What are Municipal Bonds?

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What are Municipal Bonds? Blog Image

About Municipal Bonds:

  • What is it? A municipal bond or muni bond is a debt instrument issued by municipal corporations or associated bodies in India. 
  • Purpose: The funds raised are used to finance socio-economic development projects.
  • History: It was first issued in the 1997 by Bangalore local body for infrastructure development projects 4 years after decentralization of powers and authorities to the Municipal bodies by the 74th constitutional amendment.
  • Tax Exemption: Municipal bonds are exempted from tax provided the buyer adheres to the rules laid by the municipal corporations. The interest is also exempted from taxes.
  • Securities and Exchange Board of India (SEBI) Guidelines :
  • The municipal body should not have a history of defaulting at repayments of loans or debt instruments acquired from financial institutions in the past year.
  • It should possess a positive net worth in all the three years preceding the issuance of municipal bonds. 
  • Such municipal entity, its Group Company or directors, and promoters shall not be mentioned in the willful defaulters’ list published by the Reserve Bank of India.


What is a bond?

  • It is a debt security.
  • Borrowers issue bonds to raise money from investors willing to lend them money for a certain amount of time.
  • When you buy a bond, you are lending to the issuer, which may be a government, municipality, or corporation.
  • In return, the issuer promises to pay you a specified rate of interest during the life of the bond and to repay the principal.


Q1) What is the difference between a debt security and equity security?

Equity securities represent a claim on the earnings and assets of a corporation, while debt securities are investments in debt instruments. For example, a stock is an equity security, while a bond is a debt security.

Source: Budget: BBMP official hails municipal bonds, expert has doubts