There are three most common types of repayment source for municipal bonds, these are;

• General Obligation Bonds – These are well known for their security and low interest rates, the agreement is to repay in full the credit given by the issuer.
• Revenue Bonds – These are most common in active, working projects and investments as the agreement is to repay based of a channel of past, present and future incomes. An example would be a share of the income a power plant may generate.
• Assessment Bonds – These involve the repayment based on taxes, usually land taxes or property taxes located within the domicile of the issuer.

There are a number of other types of municipal bond repayment sources but the above three are the most common.

Depending on the value or importance of the municipal bond, you will quite often see external or third parties involved in reviewing and guaranteeing a repayment source or agreement. Typically the agreement is reviewed and then rated by the external agency, both sides of the municipal bond ie; investment holder/issuer will receive a copy of the review and the assigned bond rating.

In the United States of America there are three rating agencies most commonly used, these are; Fitch, Moody’s and Standard & Poor’s.

Breaking this down into more manageable chucks; typically, interest payable on municipal tax bonds is usually exempt from all federal taxes, so too local and state taxes. Of course it does depend on the state that the bonds were initiated in and subject to other restrictions but in essence; municipal bond investing quite often has an attractive tax-exempt quality.

The calculation of whether municipal bonds become taxable is usually through which type of project it is funding. For instance; projects initiated for the greater good of the public, for example; a railway network, would more than likely be a tax free municipal bond as its development is in the best interests of the general public and everyone can benefit from, not just a private citizen or their cause. This compared to projects either partially or fully benefiting an individual or group of private parties, usually called private activity bonds, are usually subject to federal income tax.

As we have already discussed in a previous article, the legislation surrounding the tax-ability of municipal bonds and the income that they provide is extremely complex. As bonds are usually always certified by a professional law company, it should be disclosed whether they are taxable or indeed tax-exempt before they are even offered to the market. You should keep in mind that not all municipal bonds are tax-exempt, some are unfortunately fully taxable. Always check thoroughly before considering investing in municipal bonds.

When a municipal bond is initiated, the issuer normally receives a cash payment in exchange for an agreement to provide the investor who provided the cash payment, a repayment over an agreed time period. The standard repayment periods for municipal bonds can be anything from six months to 10-30 years, perhaps even longer. The shorter periods are quite rare and you would be hard pressed to find investments for such a short period of time unless either the sum being borrowed is low or the repayment period can be guaranteed. Typically, 20+ years is the industry standard.

The purpose of municipal bond investing would be to use the investment from a bond sale to pay for the project that it is being invested for, typically this is a project or a long term capital investment or development. Depending on the stipulations of the bond offering, all of the capital raised from a bond sale may be used immediately or provisions put in place to spread it over a period of time.