Municipalities include states, counties, cities, townships, school districts, hospitals, public works, highways, forestry divisions and other public governing bodies. Investors are essentially lending capital to the municipality, which guarantees making interest payments (usually semi-annually) and returning the principal at maturity.

Municipal bonds are assigned credit ratings by large agencies such as Moody’s, Standard & Poor’s (S&P) and Finch. As with most fixed-income securities, for a bond to make investment grade, it must have a rating of Baa from Moody’s, a BBB from S&P or a BBB from Finch.

Types of municipal bonds include:

Insured Municipal Bonds

Interest and principal payments are guaranteed by a third-party insurance company.

Zero Coupon Bonds

Zero coupon bonds are sold at a considerable discount from par and receive no intermittent interest payments. Investors receive the par value of the bond at maturity. This is a complimentary investment vehicle for those investors who are looking for a long-term product without periodic payments.

Floating-Rate Bonds

These types of bonds have variable interest rates that are adjusted periodically according to the pre-determined index with which they are associated. Some are indexed from short-term Treasuries and other money markets. Yields are typically lower than other fixed-income products with the same maturity because they offer protection against increased interest rates. These are suitable investments during periods of rising interest rates.

Put Bonds

Investors have the right to call the bond before its maturity date. You can ‘put’ the bond back to the issuer for the par value plus accrued interest at pre-determined intervals at your discretion. Put bonds usually yield lower rates than a comparable bond; however, you can regain your principal and reinvest in higher-yield bonds when interest rates rise.

Revenue Bonds

Investor yield payments are secured by income collected through the use of rentals, charges and tolls. These bonds are issued by special public authorities and they finance bridges, tunnels, airports, hospitals, highways, toll roads, transportation and waterworks projects.