What is a Municipal Bond?

Municipal bond interest is free from federal and state taxation if the bondholder is a resident of the state that issued the municipal bond. 

A municipal bond is a debt issued by a local government such as a city, county, port authority or water district that needs money to complete a project. Bonds are issued at a par value of $1,000. This is the amount that will be repaid to the bondholder at the conclusion of the bond’s term.

In the meantime, the issuer agrees to pay the bondholder interest. The interest rate is sometimes referred to as the “coupon,” because long ago, elaborately engraved bonds came with clip-ready coupons. The bondholder presented the coupon in order to receive the interest at regular intervals. Municipal bond interest is free from federal and state taxation if the bondholder is a resident of the state that issued the municipal bond. Capital gains (or losses) on sales still apply.

General obligation bonds are supported by the full faith and creditworthiness of issuer’s taxing authority. Some bond issues require voters to approve the additional tax that will be needed to refund the bonds and pay the interest. Once voters approve the bond issue, the money generated from selling the bonds can only be used for that specific project. Auditors assure that there is no “slush-funding,” otherwise known as fraud.

Infrastructure like roads, bridges, schools, parks, and water systems improve living conditions. This makes a community more desirable. Corporations may relocate there to take advantage of the quality infrastructure. Attracted by jobs and a high quality of life, more people follow and pay property and sales taxes.

Charlotte’s Little Sugar Creek restoration project was funded through a public/private partnership that comprised county park bonds, private donations, and foundation grants. Since its completion, developers have finished or renovated new shops and apartments along its borders increasing Charlotte’s tax base.

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