Bond Essentials

• What Are Bonds?
• Tax Benefits
• Types of Bonds
• Risks & Rewards
• Understanding Yields
• Bond Glossary

Types of Tax-Exempt Municipal Bonds

Municipal securities consist of both long-term and short-term issues. Short-term securities, often called notes, typically mature in a year or less, while long-term securities, commonly known as bonds, typically mature in more than a year. Short-term notes are used by an issuer to raise money in anticipation of future revenues such as taxes, state or federal aid payments, and bond proceeds, and to cover irregular cash flows, meet unanticipated deficits and raise immediate capital for projects until long-term financing can be arranged. Bonds are usually sold to finance capital projects over the longer term. The two basic types of municipal securities are:

General obligation bonds

Principal and interest are secured by the full faith and credit of the issuer and usually supported by either the issuer’s unlimited or limited taxing power. General obligation bonds are also voter-approved.

Revenue bonds

Principal and interest are secured by revenues derived from tolls, charges or rents paid by users of the facility built with the proceeds of the bond issue. Public projects financed by revenue bonds include toll roads, bridges, airports, water and sewage treatment facilities, hospitals and housing for the poor. Many of these bonds are issued by special authorities created for the purpose.

Source: The Bond Market Association