Municipal Bonds .December 30, 2020
A municipal bond, commonly known as a muni bond, is a bond issued by a local government or territory, or one of their agencies. It is generally used to finance public projects such as roads, schools, airports and seaports, and infrastructure-related repairs. The term municipal bond is commonly used in the United States, which has the largest market of such trade-able securities in the world. As of 2011, the municipal bond market was valued at $3.7 trillion.Potential issuers of municipal bonds include states, cities, counties, redevelopment agencies, special-purpose districts, school districts, public utility districts, publicly owned airports and seaports, and other governmental entities (or group of governments) at or below the state level having more than a de minimis amount of one of the three sovereign powers: the power of taxation, the power of eminent domain or the police power
Years after the Civil War, significant local debt was issued to build railroads. Railroads were private corporations and these bonds were very similar to today’s industrial revenue bonds. Construction costs in 1873 for one of the largest transcontinental railroads, the Northern Pacific, closed down access to new capital. Around the same time, the largest bank of the country of the time, which was owned by the same investor as that of Northern Pacific, collapsed. Smaller firms followed suit as well as the stock market.
The risk (“security”) of a municipal bond is a measure of how likely the issuer is to make all payments, on time and in full, as promised in the agreement between the issuer and bond holder (the “bond documents”). Different types of bonds are secured by various types of repayment sources, based on the promises made in the bond documents:
- General obligation bonds promise to repay based on the full faith and credit of the issuer; these bonds are typically considered the most secure type of municipal bond, and therefore carry the lowest interest rate.
- Revenue bonds promise repayment from a specified stream of future income, such as income generated by a water utility from payments by customers.
- Assessment bonds promise repayment based on property tax assessments of properties located within the issuer’s boundaries.