What is a Municipal Bond?

Municipal Bonds, also known as municipal securities, refer to bonds issued by states, regions, territories, and administrative divisions. Municipal bonds bear the normal risks of bonds, but since many municipal bonds are issued by designated financing units, there is also a considerable risk of default or deferred payment. In addition, many municipal bonds have relatively low liquidity. ^[1]

Municipal bonds

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Municipal Bonds, also known as

Municipal bonds originated in the United States in the 1920s. At the time, urban construction required a large amount of funds. Local government departments began to raise funds through the issuance of municipal bonds. After the 1970s, municipal bonds gradually rose in some countries around the world.

For the concept of municipal bonds, many people understand it as a bond issued by a local government.

According to a more consistent view, municipal bonds can be roughly divided into two categories, general obligation bonds (or GOs) and income bonds (or revenue bonds). General liability bonds are issued by states, cities, counties, or towns (governments), all backed by the issuer's tax capacity (in one or more ways), and their credit comes from the issuer's tax capacity. Revenue bonds are agencies, commissions, and authorized agencies established in accordance with the law for the construction of a certain infrastructure, such as hospitals, universities, airports, toll roads, water supply facilities, sewage treatment, regional power grids or ports, or public utilities. The bonds issued are funded by the proceeds from the paid use of these facilities. Earnings bonds are therefore named.

First of all, for general liability bonds, we can understand the following; first, this type of bonds is based on local tax capacity as a credit basis, and defaults are extremely rare. The principal and interest can be paid in full and on a regular basis in a timely manner. Called "full faith and credit bonds" (somewhat similar to "Phnom Penh bonds"). Second, this bond uses one or more methods of taxation of the issuer (relevant local government) as debt repayment funds, which are linked to the fiscal revenue budgets of governments at all levels, so these bonds should be called local government bonds. Therefore, for general liability bonds, municipal bonds can be understood as local government bonds, and their theoretical basis belongs to public debt theory.

Secondly, for income bonds, first, this type of bonds is issued by an agency or authorized institution of the "local government". The repayment of funds is derived from the income of investment projects and has no direct relationship with the "local government" budget. Second, " The "local government" does not guarantee the repayment of such bonds, it is not a direct debt or contingent debt in the "local government" budget, and it has neither direct nor indirect relationship with the "local government" budget. Therefore, understanding such bonds as "local government bonds" has neither theoretical basis nor practicality.