Municipal bonds or munis as they popularly known are debt obligations issued by different entities such as municipalities within the government. As with any bond, when you purchase munis you are in essence loaning money to the issuer. The issuer will make interest payments according to the rates agreed (usually every 6 months) till the date of maturity. This is fixed date in the future when the borrower will return the principal or the original investment.

Munis can be taxable or tax-empt. Most people are aware of the tax-empty variety because the returns on these are exempt from taxes at a federal and state level most of the time. For some investors who need to pay the alternative minimum tax (AMT) they need to pay interest on income from some munis. Please consult a tax professional prior to investing in municipal bonds if you do pay the AMT.

Two Types of Munis

There are two types of municipal bonds – GO or General obligation and revenue.

General obligation bonds are issued with the intention of raising capital immediately to finance expenses. Revenue bonds are issued to finance infrastructure projects and the income received from such projects is used for paying back the investor and for interest payments.

Risk

Most people believe that buying municipal bonds is a risk-free investment strategy. While this is one of most low-risk strategies, it is definitely not risk-free. There are risk factors such as market risk, interest rate risk, credit risk and call risk associated with purchasing munis.