Municipal & Corporate Bonds

Municipal Bonds (Munis)

• Issued by state/local governments
• Interest is EXEMPT from federal tax
• If issued in your state: exempt from state/local tax too ("triple tax-free")

GO Bonds (General Obligation)

• Backed by full taxing power of the issuer
• Voter approval typically required
• Considered safer — government can raise taxes to pay

Revenue Bonds

• Backed ONLY by revenue from a specific project (toll road, airport, hospital)
• NO taxing power behind them — riskier than GO bonds
• Do NOT require voter approval
• Subject to feasibility study

Corporate Bonds

Secured (highest to lowest priority):

• Mortgage bonds: backed by real property
• Collateral trust bonds: backed by securities
• Equipment trust certificates: backed by equipment

Unsecured:

• Debentures: backed only by creditworthiness (most common corporate bond)
• Subordinated debentures: paid AFTER regular debentures in default

Special Corporate Bonds:

• Convertible bonds: Can convert to common stock — lower coupon rate as trade-off
• Callable bonds: Issuer can redeem early (usually at a premium) — higher coupon to compensate
• Zero-coupon bonds: No periodic interest — sold at deep discount, mature at par
• Phantom income: must pay tax on annual accreted value even though no cash received
• High-yield (junk) bonds: Below investment grade (BB/Ba or lower), higher coupon to compensate for risk

Credit Ratings

• Investment grade: AAA, AA, A, BBB (S&P/Fitch) or Aaa, Aa, A, Baa (Moody's)
• Below investment grade (junk): BB/Ba and lower
• AAA = highest quality, D = default