Municipal Bonds (also referred to as “Munis”) are debt issued by local governments, state governments, districts, and other entities that serve a civic purpose.
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.
Governments and special purpose entities borrow money to finance infrastructure projects, make capital improvements, and build or make improvements to schools, roads, bridges, hospitals, power systems, and for other general purposes.
In the bond market, any entity that borrows money by issuing bonds is known as an issuer.
When a government issues Municipal Bonds, they are borrowing money to be paid back at a later date.
The date that the bonds need to be redeemed, meaning paid back, is known as the maturity date.
To entice bondholders to buy the bonds, issuers pay interest.
For most Municipal Bonds, the interest received by the bondholder is “exempt” or tax-free from federal income taxes.
“Munis” can also be free from state income taxes.
There are over 50,000 different government entities that have issued Municipal Bonds, and over 1.5 million different Municipal Bond issues.
This means that there is enormous diversity in Municipal Bonds in terms of interest rates, maturity, safety, and how easy they are to buy and sell.
If you buy a Municipal Bond issued in the state where you reside, the interest you earn on the bond is usually exempt from federal, state and local income taxes.
This is not always the case however, so its important to read the bond’s offering statement to find out the exact tax status of the bond.
Municipal Bonds are usually only available in increments of $5,000 of face value.
This means you can buy $5,000, $10,000, $15,000, and so on as long as the face value of the bonds is a multiple of $5,000.
The minimum increment is $5,000 of bonds.
In most instances, interest is paid every six months until the maturity date, when you get the face value of the bonds paid back to you.
The annual rate of paid on a bond is known as the coupon.
To a large degree, the supply of new Municipal Bond issues coming to market is predictable, as it displays strong tendencies at certain times during the year.
States and municipalities tend to close out their fiscal years on June 30th.
As a result, June is a heavy issuance month as well as September, October, and November.
All else being equal, the increased supply during these times often causes Municipal Bond yields to increase, and therefore may provide a buying opportunity.