What Are Municipal Bonds? - Definition, Types & Examples

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  • 0:04 What Are Municipal Bonds?
  • 1:10 General Obligation Bonds
  • 2:10 Revenue Bonds
  • 2:46 Lesson Summary
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Lesson Transcript
Instructor: Michael Cozad

Michael is a financial planner and has a master's degree in financial services.

This lesson will define municipal bonds, a type of debt vehicle issued by state and local governments. The two types of municipal bonds will be explored, and examples will be given.

What Are Municipal Bonds?

Have you wondered how state and local governments finance their operations? For example, where did the money for the new park in your neighborhood come from? And how is your town's hospital funded?

Municipal bonds, also known as munis, are debt vehicles issued by state and local governments to finance their operations and fund municipal projects. Debt vehicle might be a perplexing term, but think of municipal bonds as loans from lenders to state and local governments. In the case of municipal bonds, many of the lenders are individuals and institutions.

The attractiveness of municipal bonds to individual investors is that the income paid by these bonds is typically federal income tax-free. If you live in the state in which the bond was issued, the income paid by those bonds may be state income tax-free. The same goes for if you live in a county or municipality in which the bond was issued.

Municipal bonds are how state and local governments typically finance larger projects. There are two main types of municipal bonds: general obligation bonds and revenue bonds. Let's take it one type at a time.

General Obligation Bonds

General obligation bonds, also known as GO bonds, are municipal bonds that are secured by the issuer's taxing power. In the case of municipal bonds, this means that the issuing authority can use its power to enact future taxes as the security of the bond. Some bonds are supported by the authority's unlimited taxing power; others are supported by the authority's limited taxing power.

Voters typically vote upon and approve these types of bonds, due to the taxing powers. Examples of what GO bond proceeds may be used to build include roads, bridges, and parks.

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