Types of Municipal Bonds

Most people know that municipal bonds are issued by a municipality which is a city or local government and/or an agency of those government bodies. However, most people are unaware of the fact that there are different types of municipal bonds. One of the selling points of municipal bonds is the fact that they are often exempt from federal income tax and sometimes even from state taxes where those bonds were issued.

The Most Common Types of Municipal Bonds
The most common types of municipal bonds include general obligation bonds, revenue bonds, conduit bonds, insured bonds, original issue discount bonds, taxable bonds, zero coupon bonds, pre-refunded bonds, ETM bonds, housing bonds and municipal notes. Following is a brief description of each of those types of municipal bonds.

General obligation (GOs) bonds– The issuer promises to levy sufficient taxes as a means of paying investors on time and in full.

Revenue bonds – Issued to finance a project and interest and principal is paid through revenue of those projects.

Conduit bonds – Usually state issued for a third nonprofit party such as a hospital or university. The borrower (nonprofit entity) makes payments and the government does not guarantee payment.

Insured bonds – Not all municipal bonds can be considered insured but rather guaranteed by the government entity issuing the bond. Insured bonds are insured through an insurance company.
Original issue discount bonds – Price at issue is lower than par and eligible for special treatment. The only taxable amount is that between the price at which they were issued and par unless the bond is kept through to maturity at which point it becomes tax exempt.

Taxable bonds – Sometimes municipal bonds are considered to be taxable since the federal government does not agree to subsidize projects that are not deemed to be in the public interest such as sporting stadiums.

Zero-coupon bonds – These are widely sought after for investors in higher income brackets and don’t need income from current investments. Full value is paid one time at maturity instead of in installments annually or biannually.

Pre-refunded bonds – Payment (refund) of bonds is advanced and placed in escrow to be used to pay principal and interest to investors. US Treasuries fund pre-refunded escrow accounts, which is why they are viewed as relatively safe investment products.

ETM bonds – ETM bonds are secured by funds in escrow subsidized by US Treasuries and are not scheduled to be called. Seen as a fairly safe investment wherein the escrow accounts are funded by the assets.

Housing bonds – As the name implies, these bonds are backed by mortgage loan payments and mortgages in general. Are open to be called any time.

Municipal Notes – Debt that is short term maturing within 12 months or less, but at times up to 24 or 36 months. Issued to generate stability in cash flow while awaiting other revenue. There are two basic types Revenue Anticipation Notes (RANs) and Tax Anticipation Notes (TANs).

Although municipal bonds are normally seen as a safe investment product there are several different types which can provide lesser or greater security accordingly. Those which are backed by the government are generally thought to be the safest investment products while those that are backed by mortgage loans or projects not considered to be for the public good are potentially the riskiest. If you are looking for an investment that bears little watching over its lifetime, municipal bonds would be a good choice. Since there are so many different types of municipal bonds it should not be difficult to find one to fit both your budget and your investment strategy.

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