Feb. 1, 2018 Show
The SEC’s Offices of Investor Education and Advocacy and Municipal Securities are issuing a series of three Investor Bulletins to help educate investors about the municipal securities market. This Bulletin provides an overview of municipal bonds, including the different types of municipal bonds, what information an investor should review before investing in municipal bonds and where investors can find information about them. What Are Municipal Bonds?Municipal bonds (or “munis” for short) are debt securities issued by states, their political subdivisions (such as cities, towns, counties, and school districts), their agencies and instrumentalities (such as housing, health care, airport, port, and economic development authorities and agencies) and U.S. territories (such as the U.S. Virgin Islands, Guam, and Puerto Rico). Municipal bonds are issued for a variety of purposes, including to finance public infrastructure projects, such as schools, highways, and water systems; to provide funds for day-to-day government needs; and to finance qualifying projects by private entities, such as hospitals, colleges, multi-family housing, and power and energy infrastructure. By purchasing municipal bonds, you are in effect lending money to the bond issuer in exchange for a promise of regular interest payments, usually semi-annually, and the return of your original investment, or “principal.” A municipal bond’s maturity date (the date when the issuer of the bond repays the principal) may be years in the future. Short-term bonds mature in one to three years, while long-term bonds may not mature for more than a decade. Bonds have a fixed face value, known as the “par” value. If bonds are held to maturity, the investor will receive the face value amount back, plus interest that may be set at a fixed or floating rate. However, if a bond is sold prior to its maturity, the investor should receive the bond’s market value, which might be more or less than its face value. A bond’s market value is determined by market forces, such as interest rate fluctuations (if interest rates go up, the bond’s value will go down, and if interest rates go down, the bond’s value will go up) and supply and demand. The two most common types of municipal bonds are the following:
The interest on municipal bonds is often (but not always) exempt from federal income tax. The interest may also be exempt from state and local taxes if you reside in the state where the bond is issued or if the bond is issued by a U.S. territory. What Information Should Investors Review Before Investing in Municipal Bonds?Investors should carefully review publicly available information about a municipal bond before making an investment decision. Available information can include:
Federal laws prohibit the Commission from requiring a municipal issuer to file any application, document, or report with the Commission before the sale of the issuer’s securities. For additional information on how the municipal securities market is regulated, please read our Investor Bulletin: The Municipal Securities Market. Where Can Investors Find Information About Municipal Bonds?Investors wishing to research municipal bonds may access a range of information online free of charge at the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access (EMMA) website. Information available to you includes:
In addition to the EMMA website, disclosure information and pricing information may also be available through the following resources:
Additional ResourcesInvestor Bulletin: The Municipal Securities Market Investor Bulletin: Municipal Bonds – Asset Allocation, Diversification, and Risk For additional investor education information, see the SEC’s website for individual investors, Investor.gov. The Offices of Investor Education and Advocacy and Municipal Securities have provided this information as a service to investors. It is neither a legal interpretation nor a statement of SEC policy. If you have questions concerning the meaning or application of a particular law or rule, please consult with an attorney who specializes in securities law. You should consult your tax advisor about tax implications. What affects marketability of municipal bonds?As a fixed-income security, the market price of a municipal bond fluctuates with changes in interest rates: When interest rates rise, bond prices decline; when interest rates decline, bond prices rise.
Which of the following factors does not affect the marketability of a municipal bond?A municipal security's marketability is affected by its maturity date, its rating, and its block size. The dated date is simply the date that interest begins to accrue; it does not affect the marketability of the issue.
Are municipal bonds marketable?Marketability—Holders of municipal securities can sell their notes or bonds in the secondary market. Municipal bonds are sold in the over-the-counter (OTC) market instead of on an organized exchange.
Do municipal bonds Have factors?However, the underlying price of a particular bond will fluctuate in the secondary market due to market conditions. Changes in interest rates and interest rate expectations are generally the primary factors involved in municipal bond secondary market prices.
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