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Municipal Bonds

Updated on March 17, 2023

Municipal bonds or ‘Muni bonds’ are debt instruments issued by municipal corporations or similar local bodies for raising funds.The Muni bonds have a fixed maturity period and a fixed interest rate. The tenure or maturity may differ and these bonds come generally for three years but there are long-term municipal bonds for ten years as well. The municipal corporations earn income by levying property tax/house tax or other such taxes and pay interest from this income on these bonds.

Reasons for issuance of Municipal Bonds

Municipal bonds are issued by various local bodies for raising funds for specific projects of importance, like- building roads, hospitals, schools, parks, sanitation projects etc.

Benefits of Municipal Bonds

a) The risk of default is relatively low as the Municipal bodies are considered to be semi or quasi government entities.
b) There is a high level of transparency in these bonds and investors can easily access information related to Muni bonds.

Limitations of Municipal Bonds

Limitations of Municipal Bonds are:
1. The returns generated may not be very attractive for investors.
2. The tenure of these bonds is reasonably high.