• What does the word municipal mean?
• What are bonds in general?
• What are Municipal Bonds?

The term "municipal," or "municipality," is a word you have probably heard of and comprehend. In general, you probably know it has something to do with local government: a town, city or perhaps local services.

To the securities industry, this is also true. But what is local government, and how local is local? It could get fuzzy. So here is the easy rule of thumb:

A municipality is any form of government other than the Federal government.

To repeat, if it is a form of government not connected to or in some way part of the United States Federal Government it is a municipality.

States are municipalities --as are State branches of government such as State agencies, departments, boards, and so on.

Cities and Counties are municipalities, and so are their agencies, departments, boards and so on.

Special operations and districts of States, Cities and Counties such as water and power, school districts, and airports as well as fire protection districts, flood control districts and so on are all considered municipalities on Wall Street.

(FYI - there are lots of municipalities in the United States)

   

In the world of high finance, there are lots of ways to raise money. The best known and most traditional methods are to issue "stocks and bonds."

Issuing stock through an initial public offering (IPO) or secondary offerings involves selling off equity stakes and bringing on new ownership who will have a share in any revenue and earnings. Issuing bonds is different and best compared to taking a loan. Instead of sharing ownership and regardless of what earnings are, there is a promise to make fixed interest payments and to pay back the borrowed amount on a fixed date.

(Don't get confused by the term "bond" which derives from the word bind and, in context, is found in such terms as "a binding agreement" or "your word is your bond." A bond is something that binds or connects. In the world of high finance, bonds connect borrowers and investors with a promise to pay.)

There are many different variations to the structure of bond issues, but here is a very general rule of thumb:

Bonds are a financing method by which money is raised through a promise to repay the face value amount at a fixed maturity date, as well as to pay interest on a fixed payment schedule.

Bonds are issued by numerous entities including the United States Treasury, corporations via "Corporate Bonds" and Municipalities through "Municipal Bonds."

   

Municipalities such as States and many types of local government, have a responsibility to provide for the needs of their citizens. But oftentimes there is not enough money in a Municipality's general or daily operating fund to pay for those needs.

This is especially true of large, capital intensive projects such as the construction and repair of bridges, highways and public schools, the building of utilities and sports stadiums, the maintenance of bus and subway lines and even the purchase of parks and open space.

Municipalities raise the necessary capital to finance these types of public projects by issuing Bonds. The money is raised, the project is completed and the face value or total principal amount of the Bond issue is repaid over time through fixed principal and interest payments.

To summarize and repeat:

Municipal Bonds are the securities industry product by which States and local governments, or Municipalities, raise money to finance public projects and pay for those public projects over time by promising to repay the face amount, or principal, and interest at specified dates.