A municipal bond is a monetary instrument issued by a state or local governmental body in exchange for money. The issuer of the municipal bond receives the cash equivalent of the bond value in exchange for a promise to repay the borrowed amount plus a fixed interest. The value of a municipal bond (sometimes referred to as a ‘muni’) is dependent on a number of factors including the credit rating of the issuing body, the interest rate of the bond, and the length to maturity. The maturity for a municipal bond can range from 1 year to as many as 30 or even 40 years. It is generally accepted that municipal bonds with a longer maturity period are more valuable to investors.

Municipal bonds are generally issued in a one of three classifications. The most common classification of a municipal bond is known as general obligation municipal bond. This is the most secure type of municipal bond available and carries with it guarantee of full payment by the issuer. This it the type of bond issued by state and federal governments. If the issuer is planning to use a recognized revenue stream such as sales taxes, utilities, or other secure source, the entity would issue a revenue municipal bond. This type of municipal bond is guaranteed to be paid provided the identified revenue source is available. Finally assessment municipal bonds are based primarily on revenue generated from property taxes.

Municipal bonds are typically issued to fund projects that can not be covered in the current budget, but need to be competed in a reasonable time. The types of project you tend to find tied to bonds are road or school improvement, health or safety service expansions, or city improvements. A bond is a viable alternative to raising taxes if the municipality believes they can afford to repay the bond.

As an investor, you would be interested in municipal bonds because they may be exempt from state and federal income tax making the net yield of a municipal bond higher than a standard treasury bond. You can have your broker add municipal bonds to your portfolio if you want to directly invest in them, or as an alternative you can select a mutual fund that specializes in municipal bonds. In many ways the latter alternative can reduce risk and provide more freedom to the investor. Be advised that in general this type of mutual fund carries a load so your net yield might be a bit reduced than the direct investing route.