Public Entity Raises Capital
A municipality or public authority issues debt to raise money for eligible projects, infrastructure or other financing needs.
MUNICIPAL BONDS
Municipal Bonds Explained How They Work and What Investors Should Know
Learn how municipal bonds help fund public projects, how investors may earn interest, how general obligation and revenue bonds differ, and what tax, credit, liquidity and market risks to consider.
MUNICIPAL
BOND
FIXED INCOME
Public Projects
Maturity
Yield
UNDERSTANDING MUNICIPAL BONDS
What are municipal bonds?
Municipal bonds are debt securities issued by states, cities, counties, public authorities and other eligible governmental entities to help finance public projects and operations.
When an investor purchases a municipal bond, the investor is providing capital to the issuer under a defined set of terms. Those terms can specify the interest rate, payment schedule, maturity date and other features of the security.
Municipal financing can support projects such as schools, transportation systems, water infrastructure, hospitals, utilities and other public-purpose initiatives.
Public-sector borrowing meets investor capital
Municipal bonds connect public financing needs with investors seeking potential fixed-income returns.
HOW MUNICIPAL BONDS WORK
Follow the path from public financing to repayment.
The basic structure of a municipal bond involves an issuer raising capital from investors and repaying that debt according to defined terms.
Investors Provide Funds
Investors purchase the bonds and provide capital to the issuer under the terms established when the debt is issued.
Interest Payments
Depending on the bond structure, investors may receive scheduled interest payments during the life of the security.
Principal Repayment
If the issuer meets its obligations, the principal is generally scheduled to be repaid when the bond reaches maturity.
TWO IMPORTANT STRUCTURES
General obligation and revenue bonds work differently.
Understanding the source of repayment is an important part of evaluating municipal bonds.
01
General Obligation Bonds
General obligation bonds are generally supported by the issuer's broader taxing power or general revenues. Investors therefore examine the issuer's overall fiscal condition and ability to meet its debt obligations.
Repayment source
General revenues and taxing authority
02
Revenue Bonds
Revenue bonds are generally backed by revenues generated from a specific project, system or service. The financial performance of that underlying source can therefore be an important consideration.
Repayment source
Revenue from a specific project or service
MUNICIPAL FINANCING
Municipal bonds can help fund the infrastructure people use.
Municipal debt can be used to finance projects that support communities and public services. The exact use of proceeds depends on the bond and the issuing entity.
For investors, understanding what supports the debt can provide useful context when evaluating the security's credit characteristics and repayment structure.
Infrastructure financing
Public-service projects
Long-term capital needs
TAX CONSIDERATIONS
Municipal bond income can have important tax considerations.
One reason municipal bonds attract investor attention is that interest from certain municipal securities may receive favorable tax treatment under applicable federal, state or local rules.
Tax treatment depends on the specific bond, the investor's circumstances and applicable tax laws. A bond's tax characteristics should therefore be evaluated alongside its yield and risk profile.
Look beyond the stated yield
Comparing taxable and tax-advantaged investments may require considering the investor's applicable tax situation.
TAX
CONSIDERATIONS
MATTER
Federal
State
Local
MUNICIPAL BOND RISKS
Municipal bonds are not risk-free investments.
The creditworthiness of the issuer, market interest rates, liquidity and other factors can affect the value and performance of a municipal bond.
Credit Risk
An issuer or project supporting the bond may face financial difficulties that affect its ability to make scheduled payments.
Interest Rate Risk
Existing bond prices can change when market interest rates move, especially when investors trade before maturity.
Liquidity Risk
Some municipal securities may trade less frequently than others, potentially affecting the ease and price of selling.
Project Risk
For revenue bonds, changes in the financial performance of the underlying project or service can influence repayment capacity.
WHAT TO EVALUATE
A municipal bond deserves a closer look before you invest.
Yield is only one part of the picture. Investors can examine several characteristics to better understand a municipal security.
Issuer Financial Strength
Consider the issuer's financial position, revenue sources, debt obligations and fiscal conditions.
Credit Quality
Review available credit information and understand what supports the bond's repayment obligations.
Maturity
Understand when principal is expected to be repaid and how that timeframe fits your investment horizon.
Yield
Compare yield alongside price, maturity, credit quality and tax characteristics rather than considering yield alone.
Liquidity
Consider trading activity and how easily the bond could potentially be sold if your circumstances change.
Tax Treatment
Understand the applicable tax treatment and how it relates to your individual financial circumstances.
MUNICIPAL VS CORPORATE BONDS
Two fixed-income choices, different characteristics.
Comparing issuer type, repayment sources, risk and tax considerations can help investors understand the differences.
Factor
Municipal Bonds
Corporate Bonds
Typical Issuer
States, cities and public authorities
Companies
Financing Purpose
Public projects and services
Corporate financing needs
Credit Risk
Depends on issuer and bond structure
Depends on corporate issuer
Tax Considerations
May receive favorable treatment in certain cases
Generally taxable interest
Key Evaluation Areas
Issuer, project, yield, maturity and taxes
Credit, yield, maturity and liquidity
PORTFOLIO ROLE
Where can municipal bonds fit within an investment portfolio?
Some investors use municipal bonds as part of a diversified fixed-income allocation. Their potential income and tax characteristics may make them relevant to certain investors.
The right role depends on factors such as investment objectives, time horizon, liquidity needs, tax circumstances and tolerance for investment risk.
DIVERSIFIED
PORTFOLIO
FIXED INCOME
Income
Maturity
Risk
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FREQUENTLY ASKED QUESTIONS
Common questions about municipal bonds.
Municipal bonds are debt securities issued by states, municipalities, public authorities and other eligible governmental entities to raise capital for public purposes and projects.
Investors purchase municipal bonds and provide capital to the issuer. Depending on the bond structure, investors may receive scheduled interest payments and principal is generally scheduled for repayment at maturity.
General obligation bonds are generally supported by an issuer's broader revenues or taxing authority, while revenue bonds are generally supported by revenues generated from a specific project, system or service.
Certain municipal bond interest may receive favorable tax treatment, but the exact treatment depends on the specific security, applicable tax rules and the investor's individual circumstances.
Municipal bonds are not risk-free. Investors can face credit, interest rate, liquidity and other risks. Risk levels can vary significantly between issuers and individual securities.
Yes. Municipal bond prices can change before maturity due to movements in interest rates, changes in credit quality, liquidity conditions and broader market factors.
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