Glossary of Municipal Bond Terms
Municipal bonds carry specialized vocabulary that creates barriers for new investors. This glossary defines the 30 essential terms you'll encounter when researching, buying, and monitoring muni bonds.
Advance Refunding — Refinancing bonds more than 90 days before the original redemption date, typically by placing proceeds in escrow; tax-exempt advance refundings were eliminated by the Tax Cuts and Jobs Act in December 2017.
Alternative Minimum Tax (AMT) — A parallel federal tax calculation that ensures taxpayers pay a minimum amount; interest from private activity bonds counts as AMT income, potentially reducing the tax benefit for affected investors.
Bond Insurance — Third-party guarantee of principal and interest payments, typically provided by AA-rated insurers like Assured Guaranty (54% market share in H1 2024) or Build America Mutual (46% market share).
Build America Bonds (BABs) — Taxable municipal bonds issued between April 2009 and December 2010 with a 35% federal interest subsidy; over $181 billion issued during the program's 21-month existence.
Call Provision — The issuer's contractual right to redeem bonds before maturity, typically at par plus a small premium (0.5-2%); protects issuers against falling interest rates but limits investor upside.
Continuing Disclosure — Ongoing financial reporting obligations for municipal issuers under SEC Rule 15c2-12, including annual financial statements and material event notices filed on EMMA.
Credit Enhancement — Mechanisms that improve a bond's credit quality, including insurance, letters of credit, reserve funds, and state intercept programs.
CUSIP — Committee on Uniform Securities Identification Procedures number, a unique nine-character identifier for each bond issue; EMMA tracks over 1 million CUSIPs from 50,000 distinct issuers.
Current Refunding — Refinancing bonds within 90 days of the original redemption date; remains tax-exempt under current IRS rules.
De Minimis Rule — IRS threshold determining whether market discount receives capital gains or ordinary income treatment upon sale; bonds purchased at discounts exceeding this threshold face ordinary income tax on the discount portion.
Debt Service Coverage Ratio (DSCR) — Revenue available for debt payments divided by required debt service; 1.2x or higher indicates adequate coverage, while below 1.0x signals potential payment difficulty.
Defeasance — Legal release of a borrower from debt obligations when escrowed funds (typically Treasuries) are sufficient to cover all remaining principal and interest payments.
EMMA — Electronic Municipal Market Access, the SEC-designated official source for municipal securities data since 2009; provides free access to official statements, continuing disclosures, and trade prices.
Escrowed to Maturity (ETM) — Bonds backed by escrowed Treasury securities sufficient to pay all principal and interest through maturity; typically receive higher ratings due to Treasury backing.
Essential Service Revenue — Income from critical public services (water, sewer, electric) that typically continues even during issuer distress; Detroit's water and sewer bonds paid 100% throughout bankruptcy while GO holders recovered approximately 75 cents.
General Obligation (GO) Bond — Municipal bond backed by the full faith, credit, and taxing power of the issuing government; the taxing pledge distinguishes GOs from revenue bonds.
High-Yield Municipal Bond — Bonds rated Ba1/BB+ or lower by major rating agencies; characterized by longer duration (7.3 years average) and stronger covenants than high-yield corporates.
MSRB — Municipal Securities Rulemaking Board, the self-regulatory organization that writes rules for municipal securities dealers and advisors; operates EMMA and establishes dealer conduct standards.
Muni-Treasury Ratio — AAA municipal yield divided by Treasury yield of similar maturity; historically ranges 80-90%, with ratios above 100% suggesting munis offer attractive relative value.
Official Statement (OS) — Disclosure document for municipal bond offerings, analogous to a corporate prospectus; contains financial information, security provisions, and risk factors.
OPEB — Other Post-Employment Benefits, primarily retiree healthcare obligations; often an unfunded liability that competes with bondholders for future revenues.
Pension Obligation Bonds (POBs) — Bonds issued to fund pension liabilities; historically treated poorly in municipal bankruptcies (San Bernardino proposed 1% recovery, Detroit achieved 12% recovery).
Private Activity Bond — Tax-exempt bonds financing projects with significant private benefit (airports, housing, industrial development); subject to federal volume caps and often AMT-applicable.
Qualified 501(c)(3) Bond — Tax-exempt bonds issued for nonprofit organizations including hospitals, universities, and cultural institutions; exempt from AMT.
Revenue Bond — Municipal bond backed by income from a specific project or source (tolls, utility fees, hospital charges) rather than general taxing power.
Separately Managed Account (SMA) — Individual portfolio managed according to specific objectives; offers tax-loss harvesting advantages over funds and has grown from $778 billion (2013) to $2.2 trillion (2023).
Tax-Equivalent Yield — The pretax yield a taxable bond must offer to equal the after-tax return of a tax-exempt municipal; calculated as Muni Yield / (1 - Tax Rate).
Triple-Tax-Exempt — Bonds exempt from federal, state, and local income taxes; typically applies to in-state purchases, though Puerto Rico bonds historically offered triple exemption regardless of investor residence.
Yield to Call (YTC) — Yield calculation assuming the bond is redeemed at the earliest call date; relevant when bonds trade above par and calling is likely.
Yield to Worst (YTW) — The lower of yield to maturity and yield to call; represents the minimum yield an investor can expect assuming the issuer exercises the most disadvantageous option.
Related Reading:
- General Obligation vs Revenue Bonds — Understanding pledge types
- Essential Service Revenue Streams — Why water and sewer bonds held up in Detroit
- High-Yield Municipals and Credit Work — Below-investment-grade analysis
- Tax-Equivalent Yield Calculations — The math behind muni value
Source: MSRB Rule Book, 2024; SIFMA Municipal Bond Statistics.
Glossary updated January 2025. Terms and regulations may change; verify current rules with a qualified advisor.