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.
