Municipal Bonds

There are two major types of municipal bonds (“munis”): revenue bonds and general obligation bonds. Revenue bonds are backed by the revenues of a specific municipal project. General obligation bonds are backed by the taxing power of the issuer. The list below summarizes characteristics of municipal bonds.

• Issuer: Municipal bonds are issued by state and local governments.
• Par value: Municipal bonds are issued in amounts of $5,000 and greater.
• Maturity: Municipal bonds can have varying maturity lengths. Generally, short-term municipal bonds mature in one to five years; intermediate-term municipal bonds mature in six to ten years; and long-term municipal bonds mature in eleven or more years.
• Taxes: Municipal bonds are exempt from federal taxes, but they are not necessarily exempt from state and local taxes. Municipal bonds may be exempt from state and local taxes if the holder lives in the state where the bond was issued.
• Risk and return: Returns on municipal bonds are generally higher than returns on government bonds to compensate for increased risk, as government bonds are essentially risk free. However, returns are generally lower for municipal bonds than corporate bonds because municipal bonds are exempt from federal taxes.
• Ratings: Most municipal bonds are rated by bond-rating companies.
• Trading: Municipal bonds are traded through brokers and over the counter.
• Call provision: Municipal bonds are sometimes callable.

Agency Bonds

Agency bonds (agencies) are issued by various federal, state, and local agencies that are authorized by Congress to issue bonds. Examples of agencies that are authorized to sell bonds include the Federal National Mortgage Association (FNMA, also called Fannie Mae), the Federal Home Loan Bank (FHLB, or Freddie Mac), and the Government National Mortgage Association (GNMA, or Ginnie Mae). The list below summarizes the characteristics of agency bonds.

• Issuer: Agency bonds are issued by various federal, state, and local agencies; these institutions have all received congressional authorization to sell agency bonds.
• Par value: Agency bonds are generally issued in amounts of $25,000 and greater. Agency bonds usually require a higher minimum investment than the minimum investment required by other types of bonds.
• Maturity: Agency bonds have varying maturity lengths. Generally, short-term agency bonds mature in one to five years, intermediate-term agency bonds mature in six to ten years, and long-term agency bonds mature in eleven or more years.
• Taxes: Agency bonds offered by Ginnie Mae, Fannie Mae, and Freddie Mac are taxable. Agency bonds offered by other federal agencies are exempt from state and local taxes.
• Risk and return: Agency bonds are more risky than Treasury bonds and consequently pay higher returns.
• Ratings: Some agency bonds are rated by bond-rating companies.
• Trading: Agency bonds are traded through brokers and over the counter; they are also traded directly through banks.
• Call provision: Agency bonds are not callable.