An Introduction to the U.S. Municipal Bond Market
With a market value exceeding $2.6 trillion, the U.S. municipal securities market offers state and local governments many capital investment-financing opportunities. Many readers, however, may lack an understanding of the issuance process, the quality of the available information, or the inherent risks associated with these instruments. We describe the traditional municipal bonds process beginning with the initial offering preparations and the methods of sale. We discuss the types of interest costs and the use of the bond proceeds. We identify typical bond types and call provisions. We then turn to a discussion of the investment characteristics of municipal bonds. We explain credit ratings, credit enhancements, potential risks, and oversight and reporting. Our discussion is supplemented with data from the municipal bond market from 2001-2007. Our paper provides the reader with a basic understanding of the institutional structure, available information, and potential risks for this economically significant market.