The Different Types of Muni Bonds

There are many different types of muni bonds that investors should be aware of. All of them offer unique benefits, as well as potential drawbacks. Although these bonds often times get lumped together, there are definite ways to differentiate them.

General Obligation Bonds

The principal and interest attached to general obligation bonds are secured by the issuer. With these, the municipality is promising to collect enough in taxes to make complete, timely payments to all investors.

Revenue Bonds

These bonds are secured by revenues generated by a project that is being financed. These are higher risk investments than general obligation bonds because they are not backed by the municipality’s ability to generate the money through tax collection.

Insured Bonds

In many cases, muni bonds are insured by policies from commercial insurance providers. With these, the insurance company will offer payment to the investor should the original issuer default.

Since there is a guarantee of payment with insured bonds, there is a lower risk. In turn, the interest rate will be lower than bonds that are uninsured.  

Taxable Bonds

In some cases, muni bonds are taxable. This is the case when the government will not subsidize financing for activities that do not greatly benefit the public and area as a whole. For instance, the construction or renovation of a local sports stadium or the need to use the money to subsidize a pension fund.  

Zero Coupon Bonds

These are perfect for high income investors who are not interested in receiving the income in the near future. These bonds are issued at a great discount, with the value, including interest, being paid out at full maturity. 

Escrowed to Maturity Bonds

With refunded bonds that are not set to be called, escrowed to maturity bonds are used. With these, payments are made as outlined in the original bond.

Municipal Notes

In most cases, a municipal note is attached to short term debt obligation and is set to reach full maturity within three years. Municipalities rely on these notes as a way of generating quick cash, while waiting for other financing to come through.

The main issue with municipal notes is that they usually require an investment of $100k or more, based on the needs of the municipality.

There are many benefits of investing in muni bonds. Counties, cities, and states issue these as a way of funding projects including everything from the construction of a hospital or school to upgrading roadways and electrical and plumbing systems.

It is important to be aware of the different types of muni bonds before investing. Some of them offer a higher rate of return, if everything goes to plan. But just like all investments, a higher potential return means that you are taking a bigger risk.

Every muni bond has something to offer, and a list of investors who are interested in them. This is why you will find many municipalities offering a wide range of investment opportunities.