Municipal Securities: Types, Features and Characteristics
Types
Municipal securities are obligations of states, political subdivisions, territories and their authorities, issued to finance public purposes. Interest is generally excluded from gross income under IRC §103, and munis are exempt from SEC registration, though antifraud liability still applies.
Know the pledges. General obligation (GO) bonds carry the issuer's full faith, credit and taxing power - unlimited (ad valorem taxes with no statutory cap) or limited (capped by statute). Revenue bonds are payable solely from a defined revenue stream such as user charges, tolls or rents, and carry no taxing power. Special tax bonds pledge a designated tax; special assessment bonds are paid from charges on properties benefiting from an improvement and may carry an issuer guarantee. Private activity bonds benefit a private party; qualified issues (501(c)(3), housing, exempt facilities, small-issue manufacturing) remain tax-exempt, and some are AMT preference items. Double-barreled/hybrid issues combine pledges, usually revenues first and taxes second.
Structures: serial bonds mature in installments; term bonds mature on one date with a mandatory sinking fund. Optional and special calls create reinvestment risk; puts favor holders; capital appreciation bonds pay no current interest and accrete; variable-rate demand obligations reset and usually carry a put backed by a liquidity facility. Par is typically $5,000 with semiannual coupons.
Trap: a revenue bond never pledges taxing power, but a special assessment bond may also be a GO if the issuer guarantees it; "double-barreled" means two pledges, not two issuers.
Rule of thumb: if the only source named is facility revenues, it is a revenue bond no matter how strong the project.