SIE for Dummies: Municipal Bonds

2025-2026

General Obligation (GO) Bonds

Municipalities issue them to fund nonrevenue-producing facilities; aren’t self-supporting. Funds schools, libraries, police departments, fire stations, etc. Backed by full faith and credit (taxing power) of the municipality. Taxes received from the people living in the municipality back GO bonds. Often requires voter approval, the taxpayers have the right to vote on the project when a municipality reaches their statutory debt limit. Higher ratings and lower yields than revenue bonds because of lower risk.

Quality (rating)

Higher the credit rating, safer the bond, and thus more marketable.

Maturity

Shorter the maturity, more marketable bond issue is.

Call Feature

Callable bonds are less marketable than noncallable bonds.

Interest (coupon) Rate

Everything else somewhat equal, bonds with higher coupon rates are more marketable.

Block Size

Number of securities sold in initial offering. Larger, more marketable.

Dollar Price

All else equal, lower the dollar price, more marketable.

Issuer’s Name

Local or national reputation. MOre marketable when the issuer has a good reputation for paying off bonds on time.

Sinking Fund

If the issuer has put money aside to pay bonds off at maturity, bonds are more marketable because default risk is lower.

Insurance

If bonds are insured against default, they’re considered to be very safe and much more marketable. Bond … is considered to be a credit enhancement.

Safety of a GO Bond

Look at municipality’s name (and credit history) AND current debt (debt the municipality owes directly) and net overall debt (including debt issuer owes directly and overlapping debt). Look at taxes - property (collected by local municipalities, NOT state) and sales tax. Higher property value, larger tax base, safer municipal bond issue. GO is also backed by traffic fines, licensing fees, sales taxes, etc.

Overlapping Debt

Debt that an issuer owes for being part of a larger state and local government.

Revenue Bonds

Issued to fund municipal facilities that will generate (ideally) enough income to support the bonds. Raise money for certain utilities, toll roads, airports, hospitals, student grants by certain states, etc. Don’t need voter approval. Require a feasibility study - municipality hires consultants to prepare a study that includes estimates of revenue the facility could generate, along with any economic, operating or engineering aspects of the project that would be of interest to the municipality. *Covenant

Industrial Development Revenue Bonds (IDRs)

Municipality issues to finance construction of a facility for a corporation that moves into that municipality. Backed by lease payments made by a corporation, thus credit rating is derived from credit rating of the corporation. Riskiest of municipal bonds. Issued for the benefit of corporations, interest income may not be federally tax-free to investors who are subject to the alternative minimum tax (AMT).

Safety of Revenue Bonds

Look at credit enhancement (insurance, higher safety), call features (callable, higher yield than noncallable because more risk), and covenants. Municipalities must provide financial reports and that they are subject to outside audits for all revenue bonds issued.

Covenants

Promises that protect investors by holding the issuer legally accountable. Types - Rate, Maintenance, Insurance.

Rate Covenant

Promise that the municipality will charge sufficient fees to people using the facility to be able to pay expenses and the debt service (principal and interest on the bonds).

Maintenance Covenant

Promise that the municipality will adequately take care of the facility and any equipment so the facility continues to earn revenue.

Insurance Covenant

Adequately insure the facility.

Primary Market

Bringing new municipal bonds to market.

Negotiated Offering

Issuer chooses the underwriter(s) directly. Municipalities typically choose directly, often have a relationship with one or more underwriters. Because revenue bonds aren’t backed by taxing power like GOs are, issuers aren’t obligated to get the best price or coupon rate for their bond issue.

Competitive Offering

Because GO bonds are backed by taxing power of the municipality, issuers are responsible for getting the best deal for the people who live in their municipality. Post notice of sale in Daily Bond Buyer. Interested underwriters submit a good faith deposit and their bids to the issuer. The winner of the bid will be the underwriter that presents the lowest cost to taxpayers backing the bond, meaning issuing with lower coupon rate and/or agreeing to pay more to purchase the bonds. Others get their good-faith deposit back.

Notice of Sale

Advertisement bond issuers post saying that they’re accepting bids on a new issue of bonds. Contains all bidding information about new municipal issues. Tells potential underwriters where to submit bids, amount of the good-faith deposit, whether it’s expecting bids on the basis of net interest cost (NIC) or true interest cost (TIC, which considers the time value of money), amount of bonds to be issued, maturity of bonds to be issued, etc. Underwriters’ responsibility to determine coupon rate and selling price of the issue.

Daily Bond Buyer

Main source of information about new municipal bonds.

Spread

Difference between cost the issuer pays for the security and amount it receives from investors.

Municipal Advisers

Firms or professionals that provide professional advice on bond sales and other financial advice to state and local governments. Help the state or local government decide the timing, structure, terms, amount, coupon rate, maturity schedule, and other aspects of borrowing money (issuing debt securities).

Allocation of Orders

Under Municipal Securities Rulemaking Board (MSRB) rules, all syndicates must establish this. States which orders are to be filled first, a priority provision. Must be supplied to customers who request it. In the syndicate agreement and must be signed by all syndicate members.

Typical Allocation of Order

1) Presale orders. 2) Syndicate (group-net) orders. 3) Designated orders. 4) Member Orders.

Presale Orders

First in allocation of order. Entered before the date when the securities were officially available for sale.

Syndicate (group-net) Orders

Second in allocation of orders. The syndicate member receiving the order credits the sale to all the syndicate members, so all members profit. When an investor places a syndicate order, they do not designate a single firm to receive the credit; instead, the whole group shares the commission.

Designated Orders

Third in allocation of orders. The buyer specifies which syndicate member is to profit from the sale.

Member Orders

Last in allocation of orders. If any securities are left, syndicate members may purchase them for their own portfolios.

Date of Sale

Date when the bids are submitted to the issuer for competitive offerings. For negotiated offerings, this date is when the syndicate signs the final contract. In both cases, the syndicate manager sends a commitment wire to the other syndicate members on this date.

Presale Period

Period preceding the date of sale.

Order Period

Time (established by the syndicate manager) during which syndicate members may solicit customers.

Underwriting Period

Begins when the first order is submitted to the syndicate or when the securities are purchased from the issuer, whichever happens first. Ends when the issuer delivers securities to the syndicate or the syndicate sells all the securities purchased from the issuer, which happens last.

Special Tax Bonds

Bonds secured by one or more taxes other than ad valorem (property) taxes. May be backed by sales taxes on fuel, tobacco, alcohol, business license taxes, etc.

Special Assessment (special district) Bonds

Bonds issued to fund the construction of sidewalks, streets, sewers, etc. Backed by taxes only on the properties that benefit from the improvements.

Double-Barreled Bonds

Bonds are a combination of revenue and GO bonds. Municipalities issue these to fund revenue-producing facilities (toll bridges, water and sewer facilities, etc.), but if revenue taken in isn’t enough to pay off the debt, tax revenue makes up the deficiency.

Limited-Tax General Obligation Bonds (LTGO)

GO bonds for which the taxes backing the bonds are limited. Secured by all revenue of the municipality that isn’t used to back other bonds. The amount of property taxes municipalities can levy to back these bonds is limited. If backed by an unlimited tax pledge, the municipality can raise property tax rates to ensure bonds can be paid off, which is good for investors but bad for homeowners.

Public Housing Authority Bonds (PHAs)

aka New Housing Authority (NHA) bonds. Issued by local housing authorities to build and improve low-income housing. Backed by US government subsidies, and if the issuer can’t pay, the US government makes up any shortfalls. Thus considered safest municipal bonds.

Moral Obligation Bonds

Issued by a municipality but backed by a pledge from the state government to pay off the debt if the municipality can’t, thus safer. Need legislative approval to be issued. The state has a moral responsibility, but NOT legal obligation, to help pay off the debt if the municipality can’t.

Build America Bonds (BABs)

Taxable municipal bonds created under the Economic Recovery and Reinvestment Act of 2009. To help municipalities raise money for infrastructure projects. Higher coupon rate than most other municipal bonds because the municipality receives tax credits from the federal government OR are more attractive because investors receive tax credits from the federal government. Expired in 2010, but plenty still out there.

Tax Credit BABs

Investors in these bonds receive tax credits equal to 35% of the coupon rate.

Direct Payment BABs

Municipality issuer receives reimbursement from the US Treasury equal to 35% of coupon rate, hence usually have higher coupon rate than Tax Credit BABs.

Municipal Notes

Issued municipalities need short-term (interim) financing. Bring money in until other revenue is received. Typical maturities of one year or less (usually 3 to 5 months).

Tax Anticipation Notes (TANs)

Notes provide financing for current operations in anticipation of future taxes (ex. Ad valorem taxes) that the municipality will collect.

Revenue Anticipation Notes (RANs)

Notes provide financing for current operations in anticipation of future revenue that the municipality will collect.

Tax and Revenue Anticipation notes (TRANs)

Notes are a combination of TANs and RANs.

Grant Anticipation Notes (GANs)

Notes provide interim financing for the municipality while it’s waiting for a grant from the US government. Notes paid off from grant funds.

Bond Anticipation Notes (BANs)

Notes provide financing for the municipality while it’s waiting for long-term bonds to be issued.

Construction Loan Notes (CLNs)

Notes provide interim financing, typically for the construction of housing projects. Typically paid back by the money the issuer receives from issuing longer-term bonds.

Tax-Exempt Commercial Paper

Short-term notes usually issued by organizations such as universities with permission of the government. Debt obligation usually lasts up to 270 days to help the organization cover its short-term liabilities.

Variable-Rate Demand Note

Notes have a variable (floating or fluctuating) interest rate and have a put option (an option to sell back to the issuer). Gives the holder the ability to periodically (typically daily or weekly) return the note to the issuer at the stated value.

Municipal Note Rating

(Best to worst). Moody’s - MIG 1, 2, 3, 4; Standard & Poor’s - SP-1, 2, 3; Fitch - F-1, 2, 3.

Municipal Fund Securities

Similar to investment company securities but are exempt from that definition under section 2(b) of the Investment Company Act of 1940. Established by municipal governments, agencies, or educational institutions but don’t represent loans to the government. Included are Section 529 savings plans, Achieving a Better Life Experience (ABLE) accounts, and Local Government Investment Pools (LGIPs).

Rule G-45

Rule requires dealers underwriting ABLE programs or 529 savings plans (not LGIPs) to submit information such as plan descriptive information, assets, asset allocation information for each plan available, contributions, performance data, etc., semiannually and performance data annually through the Electronic Municipal Market Access (EMMA) system (MSRB’s, designed to provide market transparency to help protect market participants).

Section 529 Savings Plans

Specialized educational savings accounts available to investors. Aka Qualified Tuition Plans (QTPs) because they’re designed to allow money to be saved for qualified expenses for higher education (colleges, postsecondary trade and vocational schools, postgraduate programs, etc.). As of 2018, MSRB also added as qualified higher education expenses tuition at an elementary or secondary public, religious, or private school. An owner and a beneficiary. Contribution allowance varies from state to state, made from after-tax dollars. Withdrawals of the amount invested plus interest received is tax-free, meaning earnings grow on a tax-deferred basis, and no tax is due if earnings are used for qualified educational expenses. Investors must receive an official statement or offering circular before opening the account.

Owner

The one who sets up and contributes to the plan, typically a parent.

Beneficiary

The one who benefits from the plan, typically a child or relative of the person who set up the plan.

529 Plan Notes

No income limits placed on investors in 529 plan. Contribution typically used to acquire units in a state trust, assets must be invested in a matter consistent with the trust’s investment objectives. Many investors contribute monthly, although aren’t required. Any account balances that are unused can be transferred to another immediate family related beneficiary. Assets in the account always remain under the control of the owner even after the beneficiary becomes of legal age. In some cases, plans can be set up as prepaid tuition plans or college savings plans.

Prepaid Tuition Plans

Allows investors to prepay college at a locked-in rate.

College Savings Plans

Allows owners to invest as they see fit.

ABLE (Achieving a Better Life Experience) Accounts

Designed for people with provable disabilities and their families. Allow people to invest after-tax dollars for the extra needs and expenses. Any earnings or distributions are tax-free as long as they’re used to pay for qualified disability expenses for the beneficiary. May be opened by the eligible person, parent/guardian, or a person granted power of attorney on behalf of the person with the disability. Anyone can contribute. Investments may be conservative, moderate, or aggressive. Many states have annual contribution caps and maximum account balances. May be opened for a disabled person even if they are receiving other benefits. To be eligible, the onset of the disability must have been discovered before the person reached age 26.

LGIPs (Local Government Investment Pools)

Established by states to provide other government entities (cities, counties, school districts, etc.) a short-term investment vehicle for investing their funds. Exempt from registration with the SEC. No prospectus required, but have disclosure documents to cover investment policies, operating procedures, etc. Aren’t money market funds, they’re similar in that many of them operate like those funds - typically set the net asset value (NAV) at $1, and normally, the money is invested safely, although it doesn't have to be. May be sold directly to municipalities or through Municipal Advisers hired by the municipal issuers.

Taxes on Municipal Bonds

Municipal bonds typically have lower yields than most other bonds. Lower than US government securities because they have a tax advantage. Interest received, with a few exceptions (BABs) is federally tax-free. (Interest on most US government securities is free of state taxes). Tax advantages of municipal bonds apply only to interest received, if the inventor sells municipal bonds for more than their cost basis, they have to pay taxes on the capital gains.

Taxable Equivalent Yield (TEY)

Tells what the interest rate of a municipal bond would be if it weren’t federally tax-free. TEY = municipal yield / (100% - investor’s tax bracket). Because tax brackets come into play with municipal bonds, they’re better suited for investors in higher tax brackets.

Municipal Equivalent Yield (MEY)

Yield on a taxable bond after taxes. Can be used to compare it with a municipal bond to determine best investment. MEY = Municipal Yield * (100 - investor’s tax bracket).

Triple Tax-Free Bond Territories

The interest is not taxed on federal, state, or local level. Puerto Rico, Guam, US Virgin Islands, American Samoa, Washington DC. In most cases, if you buy a municipal bond issued within your own state, the interest will be triple tax-free (don’t assume this).

Confirmation

Must be sent or given to customers at or before the completion of the transaction (settlement date). Municipal securities settle the regular way (2 business days after the trade date, or T+2). Include broker-dealer's name, address, and phone number; capacity (whether the firm acted as a broker or dealer); dollar amount of commission (if firm is acting as broker); customer’s name; any bond particulars (ex. Issuer’s name, interest rate, maturity, call features if any); trade date, time of execution, settlement date; Committee on Uniform Securities Identification Procedures (CUSIP) identification number (if there is one); bond yield and dollar price; any accrued interest; registration form (registered as to principal only, book entry, or fully registered); whether bonds have been called or pre-refunded.

Real-Time Reporting System (RTRS)

Each broker, dealer, or municipal securities dealer must report to the MSRB all transactions in municipal securities through this. Makes public reports on market activity and prices. MSRB assesses transaction fees to make sure they’re in line with MSRB rules. Must be reported promptly.

RTRS Reporting Exempt

Transactions in securities without a CUSIP number, in municipal fund securities, and interdealer transactions (OTC trades between one financial institution and another).

Advertising and Record Keeping

Brokerage firms have to keep all advertising for a minimum of 3 years, and must be easily accessible for at least 2 years. MSRB requires a principal (manager) to approve all advertising material of the firm before its first. The principal must ensure advertising is accurate and true. Advertising includes any material designed for use in the public media - offering circulars, market and form letters, summaries of official statements, etc. Preliminary and final official statements aren’t ads because they’re prepared by the issuer, therefore don’t require approval from a principal.

Gifts

According to MSRB rules, municipal securities dealers can’t give customers gifts valued at more than $100 per year. Business expenses are exempt from the rule - airline tickets (for the customer to meet with you, not vacation), hotel expenses (for the customer’s lodging while they’re meeting with you), business meals, etc. FINRA gift rules fall directly in line with MSRB’s gift rules.

Commissions

No particular guideline states what percentage broker-dealers can charge, all commissions, markups, and markdowns must be fair and reasonable, and policies can’t discriminate among customers. Consider the market value of the securities at the time of trade, total dollar amount of the transaction (more money for large transactions but percentage usually lower), difficulty of trade, you and the firm you work for are entitled to make a profit.

Bond Resolution (Indenture)

Provides investors contract terms including the coupon rate, years until maturity, collateral backing if any, and flow of funds. Almost every municipal bond comes with this which is printed on the face of most municipal bond certificates. It isn't required by law, but makes the bond more marketable because it serves as a contract between the municipality and a trustee that’s appointed to protect the investors’ rights.

Flow of Funds

How the money collected from the revenue-producing project is distributed.

Legal Opinion

Printed on the face of municipal bond certificates, this is prepared and signed by a municipal bond counsel (attorney). Purpose is to verify that the issue is legally binding on the issuer and conforms to tax laws. May state that interest received from the bonds is tax-exempt.

Ex-Legal

Bond doesn’t contain a legal opinion.

Official Statement (OS)

Municipal Bonds don’t have a prospectus, instead they have this. Like prospectuses, this comes in preliminary and final versions. The preliminary version doesn’t include an offering price or coupon rate. The document that the issuer prepares or has prepared; it states what the funds will be used for, provides information about the municipality, and offers details how the funds will be repaid. Includes offering terms, underwriting spread, description of the bonds and issuer, offering price, coupon rate, feasibility statement (for revenue bonds), legal opinion (unless ex-legal). Any dealer selling municipal securities during the underwriting period must deliver a final version of this, if there is one, to a customer by the settlement of the transaction. If a dealer sells to another dealer, it must deliver this to the purchasing dealer within one business day.

Rule G-2

Standards of Professional Qualifications. Before effecting any transaction (solicitation, negotiation, execution) in - or inducing/attempting to induce purchase/sale of - any municipal security, the dealer and every person associated with that dealer must be qualified in accordance with MSRB rules.

Rule G-3

Professional Qualification Requirements. Broker-dealers that conduct a business in general securities must have at least one associated person qualified as a municipal securities principal to oversee and supervise their municipal securities business.

Rule G-7

Information concerning Associated Persons. Associated Persons (municipal securities sales principal, municipal securities principal, general securities principal engaging in municipal securities business, municipal securities representative, limited representatives, etc.) must provide their employer a form U-4 or MSD-4 for bank dealers.

U-4 Form

Application form sent to the Central Registration Deposit (CRD) along with applicant’s fingerprints. Included in the form are the applicant’s address, work history, arrest record (if any), education, previous addresses, etc. A copy must be kept by the employer. The employer is responsible for calling previous employers to find out whether the information in the form is accurate. If an applicant's information changes any time during employment, the employer is responsible for updating the information.

Rule G-8 and G-9

Books and Records Requirements. All brokers, dealers, and municipal securities dealers must keep records regarding municipal securities business. Include records of original entry (blotters), account records, securities records, subsidiary records, put options and repurchase agreements, agency transactions, primary offerings, copies of confirmations, customer account information, customer complaints, political contributions. Maintain records of just about everything.

Blotters

Original Entry. Itemized daily records of all purchases and sales of municipal securities.

Account Records

Account records for each customer account.

Securities Records

Separate records showing all municipal securities positions.

Subsidiary Records

Records of municipal securities in transfer, municipal securities borrowed or loaned, municipal securities transactions not completed by the settlement date, etc.

Rule G-9

Preservation of Records. MRSB’s record-keeping requirements are very similar to FINRA’s requirements. Most records have to be kept for 4 or 6 years.

Rule G-10

Delivery of Investment Brochure. Broker-dealers and municipal securities dealers must send yearly written statements (may be electronic) to each customer, stating that they’re registered with the SEC and MSRB. Statement must also include the web address for the MSRB and statement of how to receive an investment brochure on the website describing customer protections and how to file a complaint to the proper authority. Same for Municipal Advisers.

Rule G-13

Quotations. MRSB Rules - all quotations for municipal securities published or distributed by any broker-dealer, municipal securities dealer, or associate person must be genuine.

Rule G-17

Conduct of Municipal Securities and Municipal Adviser Activities. Municipal securities broker-dealers, dealers, advisers, agents, etc. shall deal fairly with all people and not engage in dishonest, deceptive, or unfair practices.

Rule G-18

Best Execution. When entering into municipal securities transactions with a customer/customer of another broker, dealer, or municipal securities dealer, a broker must use reasonable diligence to attempt to get the best price for the securities (lowest buying price/highest selling price for the customer). Similar to G-30, but that includes markups, markdowns, and commission.

Rule G-21

Advertising. Ads by municipal securities dealers, brokers, and dealers can’t contain false or misleading statements. Include published material used in electronic or other public media, promotional literature made available to customers/the public, circulars, market letters, seminar text, press releases, etc. Preliminary official statements, official statements, offering circulars, etc. aren’t considered to be ads.

Rule G-25

Improper Use of Assets. Brokers, dealers, and municipal securities dealers shall NOT make improper use of municipal securities or funds held on behalf of another person. No broker, dealer, or municipal securities dealer can make a guarantee against loss, and they may not share directly or indirectly in the profit or losses in a customer’s account. An associated person may set up a partnership or joint account with a customer and share in the profits or losses based on the contribution made into the account. In that case, a proportionate sharing agreement should be in place.

Rule G-30

Pricing and Commissions. If buying or selling municipal securities for a customer on a principal basis, the aggregate price (including markdown or markup) must be fair and reasonable. If buying or selling municipal securities on an agency basis for a customer, the broker-dealer is responsible for making a reasonable effort to obtain the best price for the customer, and the commission charged must be fair and reasonable in relation to prevailing market conditions.

Principal Basis

For or from the dealer’s inventory.

Rule G-34

CUSIP numbers, new issue, and market information requirements. For new issues of municipal bonds, the managing underwriters must apply to CUSIP to receive identification numbers for the bonds for each maturity, if more than one. For negotiated offerings, the managing underwriter must apply before the pricing of the new municipal issue. For competitive offerings, the managing underwriter must apply after winning the bid. If a municipal issuer hired an adviser, the municipal adviser must apply no later than the business day after the notice of sale is published.

Rule G-37

Political Contributions and Prohibitions on Municipal Securities Business. Prohibits brokers, dealers, municipal securities dealers, and Municipal Advisers from engaging in municipal adviser business with municipal entities if they’ve made political contributions to officials of such municipal entities. Not allowed to engage in municipal securities business with that municipal entity for a period of 2 years after the contribution. Municipal Finance Professionals (MFPs) are allowed to make political contributions of up to $250 per election to a candidate they’re entitled to vote for.