Who Owns Municipal Bonds?

Municipal bonds are typically used to fund capital projects rather than recurring expenses (such as salaries or government benefits).
Schools, acute care hospitals, roads, highways, and bridges; airports; subways; seaports and marine terminals; water and wastewater facilities; multi-family housing; libraries and town halls; electric power and natural gas equipment for city-owned utilities; and other public projects are all included in these investments.
In the last decade, $2 trillion in infrastructure construction has been financed with tax-exempt municipal bonds. 1
Municipal bonds account for over two-thirds of the nation’s essential infrastructure. 2

Who buys municipal bonds?

Individuals own about 72 percent of bonds, either personally or through mutual funds and other vehicles.
Households with incomes of less than $200,000 receive roughly 40% of municipal bond interest. 4
Businesses, particularly property and liability and life insurance companies, but also banks, own about 25% of bonds.

Why do investors buy municipal bonds?

The municipal bond market is known for its stability, which attracts investors.
Bonds have been issued by state and municipal governments for centuries, and they are a well-known and well-regulated financial tool.
Investors benefit from the exclusion of interest from federal income tax.
Investors, on the other hand, accept a reduced rate of return on the bond in exchange for the tax benefit, which reduces or eliminates any tax “windfall.”

What are the financial benefits of financing with municipal bonds?

Municipal bond-financed projects cost $495 billion less in the last decade than taxable debt-financed projects. 6

How do bonds promote fiscal responsibility?

Bonds are approved by a voter referendum or a governmental body’s affirmative vote (a city council, county council, utility board, or the like).
While the federal debt has nearly doubled in real terms and as a percentage of GDP over the last decade, state and municipal debt has stayed constant. 7

Municipal bonds are either public or private.

A municipal bond is a debt obligation issued by a nonprofit organization, a private corporation, or another public entity for the purpose of financing public projects such as schools, hospitals, and roadways.

Is the US government backing municipal bonds?

Municipal bonds (also known as municipal debt) are a type of debt “State, city, county, and other local agencies issue debt securities to support day-to-day commitments as well as capital projects such as the construction of schools, roadways, and sewer systems. When you buy municipal bonds, you’re effectively lending money to the bond issuer in exchange for a promise of regular interest payments, usually semi-annually, and the return of the original investment, or a combination of the two “I am the principle.” The maturity date of a municipal bond (the day on which the bond’s issuer repays the principal) could be years away. Short-term bonds will mature in one to three years, whereas long-term bonds will take a decade or more to maturity.

Municipal bond interest is generally tax-free in the United States. If you live in the state where the bond was issued, the interest may be free from state and local taxes. Bond investors are often looking for a consistent stream of income payments and, when compared to stock investors, are more risk conservative and concerned with preserving rather than developing capital. Due to the tax benefits, tax-exempt municipal bonds typically have lower interest rates than taxable fixed-income assets such as corporate bonds with equal maturities, credit quality, and other characteristics.

States, cities, and counties issue general obligation bonds that are not backed by any assets. General obligations, on the other hand, are backed by the government “the issuer’s “full faith and credit,” which includes the ability to tax inhabitants in order to pay bondholders.
Revenue bonds are backed by earnings from a specific project or source, such as highway tolls or lease fees, rather by the government’s taxing power. Some revenue bonds are available “The term “non-recourse” refers to the fact that bondholders have no claim to the underlying revenue source if the revenue stream ceases to exist.

Municipal borrowers also occasionally issue bonds on behalf of private businesses such as non-profit universities and hospitals. The issuer, who pays the interest and principal on the bonds, often agrees to reimburse these “conduit” borrowers. The issuer is usually not compelled to pay the bonds if the conduit borrower fails to make a payment.

Where can investors find information about municipal bonds?

The Municipal Securities Rulemaking Board’s Electronic Municipal Market Access (EMMA) website makes municipal securities documentation and data available to the public for free. You will have access to:

Economic reports and events that may have an influence on the municipal bond market are listed on this calendar.

It’s worth noting that many issuers have dedicated websites or webpages for municipal bond investors. Some issuers link to those pages from their EMMA main page. Learn how to use EMMA to locate issuer homepages.

In 2009, the Securities and Exchange Commission recognized EMMA as the official depository for municipal securities disclosures. The MSRB is supervised by the Securities and Exchange Commission (SEC). The MSRB is a self-regulatory body whose objective is to promote a fair and efficient municipal securities market in order to safeguard investors, state and local governments, and other municipal entities, as well as the public interest. The disclosure materials are not reviewed by the SEC or the MSRB before they are posted on EMMA.

What are some of the risks of investing in municipal bonds?

Municipal bonds, like any other investment, carry certain risk. Municipal bond investors are exposed to a number of dangers, including:

Call it a gamble. Call risk refers to the possibility of an issuer repaying a bond before its maturity date, which could happen if interest rates fall, similar to how a homeowner might refinance a mortgage loan to take advantage of reduced rates. When interest rates are constant or rising, bond calls are less likely. Many municipal bonds are “callable,” thus investors who plan to hold a bond to maturity should look into the bond’s call conditions before buying it.

There is a credit risk. This is the risk that the bond issuer will run into financial difficulties, making it difficult or impossible to pay interest and principal in full (the inability to do so is known as “default”). For many bonds, credit ratings are available. Credit ratings attempt to measure a bond’s relative credit risk in comparison to other bonds, yet a high grade does not imply that the bond would never default.

Interest rate risk is a concern. Bonds have a set face value, which is referred to as the “par” value. If bonds are held to maturity, the investor will get the face value of the bond plus interest, which might be fixed or variable. The market price of the bond will grow as interest rates fall and fall as interest rates rise, hence the market value of the bond may be greater or lesser than the par value. Interest rates in the United States have been historically low. If interest rates rise, investors who hold a cheap fixed-rate municipal bond and try to sell it before it matures may lose money due to the bond’s lower market value.

There is a chance of inflation. Inflation is defined as a widespread increase in prices. Inflation diminishes purchasing power, posing a risk to investors who are paid a fixed rate of interest. It may also result in higher interest rates and, as a result, a decrease in the market value of existing bonds.

There’s a danger of running out of cash. This refers to the possibility that investors may be unable to locate an active market for the municipal bond, prohibiting them from buying or selling the bond when they want and at a specific price. Because many investors purchase municipal bonds to hold rather than trade them, the market for a given bond may be less liquid, and quoted values for the same bond may range.

In addition to the risks, what other factors should you consider when investing in municipal bonds?

There are tax implications. Consult a tax specialist to learn more about the bond’s tax ramifications, such as whether it’s subject to the federal alternative minimum tax or qualified for state income tax benefits.

Brokerage commissions. The majority of brokers are compensated by a markup on the bond’s cost to the firm. It’s possible that this markup will be revealed on your confirmation statement. If you are charged a commission, it will appear on your confirmation statement. You should inquire about markups and commissions with your broker.

Are municipal bonds a safe investment?

Municipal bond interest is tax-free in the United States, however there may be state or local taxes, or both.
Be aware that if you receive Social Security, your bond interest will be recognized as income when determining your Social Security taxable amount. This could result in you owing more money.
Municipal bond interest rates are often lower than corporate bond interest rates. You must decide which deal offers the best genuine return.
On the bright side, compared to practically any other investment, highly-rated municipal bonds are often relatively safe. The default rate is quite low.
Interest rate risk exists with any bond. You’ll be stuck with a bad performer if your money is locked up for 10 or 20 years and interest rates climb.

What is the source of bond money?

A bond is just a debt that a firm takes out. Rather than going to a bank, the company obtains funds from investors who purchase its bonds. The corporation pays an interest coupon in exchange for the capital, which is the annual interest rate paid on a bond stated as a percentage of the face value. The interest is paid at preset periods (typically annually or semiannually) and the principal is returned on the maturity date, bringing the loan to a close.

Is municipal bond interest taxable?

Residents of the issuing state are generally excluded from federal and state taxes on income earned from municipal bonds. While interest income is tax-free, any capital gains delivered to the investor are taxable. The Federal Alternative Minimum Tax may apply to some investors’ earnings (AMT).

Are municipal bonds registered with the Securities and Exchange Commission?

Municipal securities are divided into two types: 1) municipal bonds, which are issued by states, cities, counties, and other governmental organizations to obtain funds for the construction of roads, schools, and other public-benefit projects, and 2) municipal fund securities. Municipal bonds are often offered in $5,000 increments, pay interest twice a year, and have maturities ranging from less than one year to 30 years. 529 Savings Plans, which are established by states to provide a mechanism for investors to pay for qualified education expenses, and ABLE Programs, which are savings accounts for people with disabilities and their families, are examples of municipal fund securities. Certain investors may be able to benefit from municipal bond and municipal fund security investments.

A FINRA member who conducts municipal securities business or provides municipal advice must register with the Securities and Exchange Commission (SEC) and the Municipal Securities Rulemaking Board (MSRB), and its registered representatives must be appropriately qualified.

SEC and MSRB requirements apply to municipal securities broker-dealers and municipal advisors. The following are some of the rules that apply to municipal securities broker-dealers:

Fair Dealing — Municipal broker-dealers shall treat all customers fairly and refrain from engaging in any fraudulent, dishonest, or unfair business practices.
Suitability – Firms recommending municipal securities transactions must have reasonable grounds to believe the securities are appropriate for the customer.
This belief should be based on information from the security’s issuer or any other source, as well as all facts about the customer that are known.
Disclosures — Before or at the time of a municipal securities transaction, firms must disclose all material facts.
This requirement exists regardless of whether or not the transaction is encouraged, unlike appropriateness.
Pricing – Businesses must trade with customers at reasonable and fair prices, taking into account all relevant considerations. Part of this entails ensuring that the price is acceptable in comparison to the security’s current market price.
Firms must monitor their municipal securities businesses and have a supervisory structure in place that is adequately geared to ensure compliance with applicable rules and regulations.

The following are some of the rules for municipal advisors, in addition to Fair Dealing and Supervision:

Municipal advisors are recognized to have a fiduciary commitment to their municipal entity customers under the Securities Exchange Act of 1934. Municipal advisors’ specific behavior standards in relation to their fiduciary duty are defined by MSRB rules.

The MSRB’s Electronic Municipal Market Access system (EMMA) can be a useful tool for gathering information on municipal securities’ appropriateness, disclosures, and pricing.

Municipal advisor licensing and municipal securities disclosure regulations are regulated by the SEC’s Office of Municipal Securities.

FINRA is in charge of assessing and enforcing MSRB rules on FINRA members who are municipal securities dealers or municipal advisors.

In addition, FINRA oversees the MSRB’s professional qualifications program.

The following qualifications exams are included in this:

Municipal Fund Securities Limited Principal Qualification Examination (Series 51).

What causes municipal bonds to become free?

Municipal bonds are a wonderful option for consumers who want to keep their money while earning tax-free income.
General obligation bonds are used to quickly raise funds to meet expenses, whereas revenue bonds are used to fund infrastructure projects.
Both general obligation and revenue bonds are tax-free and low-risk investments, with issuers who are quite likely to repay their loans.
Municipal bonds are low-risk investments, but they are not risk-free because the issuer may fail to make agreed-upon interest payments or be unable to repay the principal at maturity.