Municipal Bond

4. Municipal Bond

4.1 Introduction

A municipal bond is a bond issued by a local government, or their agencies. This includes states, towns, cities, counties, school districts, hospitals, transportation authorities, universities and colleges, housing projects, road and highway authorities, water districts, and power districts.

In the United States, interest income received by holders of municipal bonds is often exempt from the federal income tax and from the income tax of the state in which they are issued, although municipal bonds issued for certain purposes may not be tax exempt (O'Hara& Neil, 2012). There are two basic types of municipal bonds, general obligation bonds and revenue bonds:

a) General Obligation Bonds

With general obligation bonds, principal and interest are secured by the full faith and credit of the issuer and usually supported by the issuers taxing power. (O'Hara& Neil, 2012). The most common issuers of general obligation bonds are states, cities and towns, School districts (school districts rely on the local town, city, or a group of municipalities that belong to the district to guarantee repayment.)

b) Revenue Bonds

Revenue bonds principal and interest are secured by revenues derived from tolls, charges or rents from the facility built with the proceeds of the bond issue. Public projects financed by revenue bonds include toll roads, bridges, airports, water and sewage treatment facilities, hospitals and subsidized housing (SIFMA, 2012).

The most common issuers of revenue bonds are transportation systems, hospitals, power, water systems and other local authorities generate revenues from providing services to the public

4.2 Feature of Municipal Bond

Tax-Exempt The salient features of municipal bonds in the United States is interest income earned from most municipal bonds is exempt from federal taxes or state income taxes, it's important for the high-income groups. For example: If...