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:
- General obligation bonds (or “GO bonds” for short) are not secured by any assets of the municipal issuer. Instead, GO bonds are backed by the “full faith and credit” of the municipal issuer, which has the power to tax residents to pay bondholders.
- Revenue bonds are not backed by a municipal issuer’s taxing power, but by revenues from a specific project or source, such as highway tolls or lease fees. Some revenue bonds are “non-recourse,” meaning that if the revenue stream dries up, the municipal issuer will not be required to pay bondholders. Some revenue bonds are “conduit” revenue bonds. Conduit revenue bonds are issued by a municipal issuer on behalf of a private entity such as a non-profit college or hospital. These “conduit” borrowers typically agree to repay the municipal issuer, who pays the interest and principal on the bonds. In cases where the conduit borrower fails to make a payment, the municipal issuer usually is not required to pay the bondholders.
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:
- Official Statements are disclosure documents prepared by a municipal securities issuer that provide investors with material information about the bond offering. Official statements include information about the terms of the bonds and financial information or operating data concerning the issuer of the bonds, as well as other entities, funds or accounts that are material to the bond offering. Official statements also typically contain information regarding: the type of bonds, interest rate, yield, maturity, call features (including whether the issuer can redeem the bonds prior to maturity), when and how principal and interest on the bonds will be paid, credit quality, security and sources of payment, past material non-compliance by the municipal issuer with its continuing disclosure obligations, and risk factors related to the bonds. The official statement also typically includes a description of the “continuing disclosure agreement” which indicates the types of continuing disclosures the municipal issuer will make available to investors and how often the issuer will provide those disclosures.
- Continuing Disclosures are ongoing disclosure documents that contain certain annual information regarding the municipal issuer’s financial condition and operating data, and information about certain events which may have a financial impact on the municipal issuer or the value of the bond. Some of these events include credit rating changes, payment delinquencies, or bankruptcy of the issuer. Investors should review the “continuing disclosure agreement” or its description in the bond offering’s official statement to see when and what types of continuing disclosures a municipal issuer will make available to investors.
- Recent trade prices provide investors with a basis for evaluating the fairness of their broker’s current price of a municipal bond in the secondary market. Investors should be aware that recent price information may not be available for municipal bonds that do not trade frequently.
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:
- Disclosure documents going back as early as 1990, including official statements and continuing disclosures.
- Historical and real-time transaction price data, including information relating to a type of municipal bond called a “variable rate demand obligation” that resets its interest rate periodically. Investors should be aware that recent price information may not be available for bonds that do not trade frequently.
In addition to the EMMA website, disclosure information and pricing information may also be available through the following resources:
- Official statements produced before June 1, 2009 and continuing disclosure documents produced before July 1, 2009, may be available from one of the following organizations: Bloomberg Municipal Repository, DPC Data, Interactive Data Pricing and Reference Data or Standard & Poor’s. The SEC does not endorse any of these organizations or their services, and there may be other providers of whom the staff is not aware. These organizations may charge a fee to access this information.
- FINRA’s Market Data Center, located at www.finra.org/marketdata, also provides price and trade information for certain municipal securities.
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.