What Are Municipal Bonds? - Definition, Types & Examples

An error occurred trying to load this video.

Try refreshing the page, or contact customer support.

Coming up next: What Are Treasury Bonds? - Definition & Rates

You're on a roll. Keep up the good work!

Take Quiz Watch Next Lesson
 Replay
Your next lesson will play in 10 seconds
  • 0:04 What Are Municipal Bonds?
  • 1:10 General Obligation Bonds
  • 2:10 Revenue Bonds
  • 2:46 Lesson Summary
Save Save Save

Want to watch this again later?

Log in or sign up to add this lesson to a Custom Course.

Log in or Sign up

Timeline
Autoplay
Autoplay
Speed Speed
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.

To unlock this lesson you must be a Study.com Member.
Create your account

Register to view this lesson

Are you a student or a teacher?

Unlock Your Education

See for yourself why 30 million people use Study.com

Become a Study.com member and start learning now.
Become a Member  Back
What teachers are saying about Study.com
Try it risk-free for 30 days

Earning College Credit

Did you know… We have over 200 college courses that prepare you to earn credit by exam that is accepted by over 1,500 colleges and universities. You can test out of the first two years of college and save thousands off your degree. Anyone can earn credit-by-exam regardless of age or education level.

To learn more, visit our Earning Credit Page

Transferring credit to the school of your choice

Not sure what college you want to attend yet? Study.com has thousands of articles about every imaginable degree, area of study and career path that can help you find the school that's right for you.

Create an account to start this course today
Try it risk-free for 30 days!
Create an account
Support