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There are two common types of municipal bonds:
general obligation and revenue.
General Obligation (GO) Bonds
These bonds are unsecured municipal bonds that are simply backed by the full
faith and credit of the municipality. Generally, these bonds have maturities
of at least 10 years and are paid off with funds from taxes or other fees.
Revenue Bonds
These bonds are used to fund projects that will eventually create revenue
directly, such as a toll road or lease payments for a new building. The
revenues from the projects are used to pay off the bonds. An interesting
twist is that in some cases the issuer is not obligated to pay interest
unless a certain amount of revenue is generated.
If a municipal bond makes sense for you, you will need to work through a
broker in order to purchase them. This is another drawback as you will be
forced to pay a commission to the broker before you finally get your hands
on the bond. When comparing these bonds to others, remember to take this
additional cost into account. In addition, municipal bonds usually come in
$5,000 par values and usually require a minimum investment of $25,000 in
order to get the best price. So, if you don't have this amount of money to
invest, you may want to look to municipal bond mutual funds to gain access
to municipal bonds .
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