Municipal Bonds
In India, local governments and municipal corporations generally depend on State & Central Government revenue transfers to maintain a balanced or surplus budget. Therefore, municipal bonds offer opportunities to tap into the capital market to acquire funds for budget maintenance and/or for infrastructure development & other public projects.
Understanding Municipal Bonds
As per the Reserve Bank of India’s guidelines, ULBs, local governments, and municipal authorities can issue bonds to investors in the secondary market to fund capital projects. Infrastructure projects include the development of schools, roads, bridges, flyovers, airports, public hospitals, etc.
The bond issuers, and government bodies, pay interest to bond investors at a particular coupon rate through the bond’s term and the entire principal on maturity. Bondholders enjoy a fixed interest rate and both short-term & long-term maturity periods from one to ten years. Retain investors can also enjoy tax exemptions in some instances.
Like corporate bonds, bond prices decline when market interest rates rise. Tax-exempt municipal bonds from government bodies with high credit ratings have almost zero credit risk. This makes a municipal bond an excellent bond investment for anyone.
Types of Municipal Bonds
1. General obligation bonds (GOs)
General obligation bonds are issued solely based on the issuer’s goodwill and credit. Therefore, bondholders have to rely on the belief and have faith that the issuer will be able to make timely payments.
2. Revenue bonds
One of the other major types of municipal bonds, revenue bonds, is backed by the revenues generated from projects and other government undertakings.
3. Insured bonds
Certain private companies offer insurance on bond investments to secure bondholders against associated risks. These insurance policies provide an unanimous guarantee of payment if the issuer meets specific criteria.
4. Taxable municipal bonds
Entirely similar to their non-taxable counterparts, taxable bonds are issued by state and local governments to fund projects with no direct benefits to the public. The central or federal government offers no tax benefits for these bonds.
5. Zero-coupon bonds
Zero coupon bonds or accrual bonds do not have any associated coupon rate; thus, no periodic payments are involved. Instead, they are sold at a significant discount on their face value. The bondholder receives the current face value on the maturity date.
6. Original-issue discount bonds
Similar to zero-coupon bonds, the issuance price or selling price of original issue discount bonds is lower than the redemption price or the purported face value of the bond.
7. Market discount bonds
A market discount bond is sold on the secondary market at a discount to its redemption prices or par value.