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What are Taxable Municipal Bonds?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 08 October 2018
  • Copyright Protected:
    2003-2018
    Conjecture Corporation
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Sometimes known as private purpose bonds or nonessential functional bonds, taxable municipal bonds are bonds that are issued by cities, towns, or other types of municipalities, and are considered taxable according to current local, state, and national tax regulations. Bonds of this type are often used for projects that are not specifically considered tax-free in light of current tax laws. In many instances, muni bonds for projects such as building a sports stadium or a convention center would be considered taxable municipal bonds.

One of the benefits of going with taxable municipal bonds is that the issues typically carry a higher rate of interest than bonds that are classed as tax-free. The increased potential return helps to make issues of this type more competitive in the marketplace, since investors are likely to generate enough extra income to offset the taxes assessed on those returns. When coupled with the fact that municipal bonds in general tend to be very safe investments, going with taxable municipal bonds is often a wise move for investors who are somewhat conservative but still want to generate the highest degree of return possible, in relation to the risk assumed.

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In most countries, the majority of bonds issued by cities and towns are taxable municipal bonds. At times, this has to do with the current tax structures and the sometimes very narrow scope of circumstances that allow for the release of tax-free bonds. In other situations, the use of taxable municipal bonds is seen as the most prudent alternative, given current economic conditions, upcoming events in bond markets, or the pool of available investors. As far as the terms and conditions found in the purchase agreement for the bond issues, there is likely to be no real difference when it comes to bond maturity dates, or when and how interest payments are tendered to investors.

As with any type of investment opportunity, investors who are interested in taxable municipal bonds should take the time to learn all they can about the opportunities. This includes assessing the stability of the municipality issuing the bond, how the returns are generated, and what guarantees the investor has of at least recouping the principal investment. Investors should also consider whatever provisions are made for calling the bond early, and what impact that would have on the returns. Only once an investor has determined that the bond issue is highly likely to produce the desired amount of return within an acceptable period of time should he or she proceed with the purchase.

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