Municipal bonds are debt obligations issued by states, cities, counties, and other governmental entities to raise funds to pay for public projects. Interest is usually paid semiannually and maturities can vary from short term to thirty years or more. Most municipal bonds are issued and traded in $5,000 denominations.
- The interest income on municipal bonds is generally exempt from federal taxes and from state taxes in the state of issuance.
- Interest on certain private activity bonds may be subject to the Alternative Minimum Tax (AMT).
- Interest on certain municipal bonds is subject to federal taxes. Some taxable municipals were issued to fund projects that, by federal government standards, don't provide a clear public benefit.
- Build America Bonds are taxable municipal bonds issued to create and repair infrastructure, and provide a subsidy to issuers from the federal government of 35% on their interest costs.
- Municipal bonds, when purchased at a discount, may subject investors to capital gains taxes when sold or redeemed. Investors should consult a tax professional for additional information.
- Many municipal bonds are rated by agencies such as Moody's Investors Service and Standard & Poor's Corporation. Ratings reflect the agencies' assessment of the creditworthiness of the issuer and its ability to timely pay interest and repay principal.
- Moody's and S&P focus on an issuer's financial condition and credit history.
- On the Moody’s rating scale, issues rated Baa3 or above are generally considered to be investment-grade, while those rated lower than Baa3 are generally considered to be below investment-grade.
- On the S&P rating scale, issues rated BBB– or above are generally considered to be investment-grade, while those rated lower than BBB– are generally considered to be below investment-grade.
- Bonds rated below investment-grade are generally considered to carry a greater degree of risk than more highly rated bonds.
- Issuers disclose information about bond issues and details of their financial condition in Official Statements, which are available through the Municipal Securities Rulemaking Board's Electronic Municipal Market Access (EMMA) portal. Issuers also provide continuing financial disclosures on EMMA.
- General obligation bonds offer principal and interest secured by the full faith and credit of the issuer and usually supported by the issuer’s taxing power.
- Revenue bonds have principal and interest secured by particular streams of revenue such as tolls, charges, or rents paid by users of the facility built with bond proceeds. Revenue bonds are not backed by the full faith and credit of the issuer.
- Insured bonds are backed by a guarantee from a municipal bond insurer. If an issuer defaults on payments, the insurer promises to make timely payments of interest and principal when due—subject to the ability of the insurer to pay claims. Before buying an insured municipal bond, consider the credit rating of both the insurer and the underlying issuer.
- Vanguard Brokerage Services® doesn't make a market in municipal bonds. If you want to sell your municipal bonds prior to maturity, Vanguard Brokerage can provide access to an active secondary over-the-counter market for many municipal bonds. Liquidity will vary depending on a bond’s features, rating, or credit quality, lot size, and other market conditions.
- On new issue municipals purchased in the primary market, Vanguard Brokerage may receive a concession from the issuer. If a concession isn't available, Vanguard Brokerage reserves the right to charge a commission. Commissions will be charged for transactions in the secondary market.