May 21, 2008 > How a Municipal Bond Works:
How a Municipal Bond Works:
Cities use municipal bonds to raise money for capital expenditures, such as roads, hospitals, and schools. For example: Hayward Unified School District issues a certain number of bonds (through a registered bond marketer). I purchase 10 Bonds for a $1.00 each. The money raised by the sale of the bonds goes into a special HUSD fund, to be spent only on specific school improvements.
The Bond is HUSD's promise to pay me back that $10, plus interest. Since this is a bond issued by a municipal entity, it is nicknamed a "muni" and I do not have to pay federal, state or local taxes on the interest I receive.
The school district now has 20 years to pay back the bondholders their purchase money, plus interest. They do this by assessing each property owner a fee, based on a percentage of the purchase price of their home. This fee is assessed over a 20 year period, in order to lessen the impact on taxpayers. The need in the Hayward Schools is so great that all the construction and improvements cannot be made in one fell swoop. Thus, the bond measure will be repeated twice, at 2 to 4 year intervals.