Bonds are debt instruments that come traditionally with a fixed interest rate, or coupon and is a loan transaction from an investor to a borrower, usually a larger entity such a government or corporate entity.

Municipal bonds are debt securities issued by cities, states, counties or countries to raise capital for infrastructure projects. The municipalities in need of capital can raise funds in primary markets via primary issuances of bonds. Once bonds are issued, they can be traded in secondary markets. Municipal bonds are associated with low risk and are often tax exempted making them especially attractive to investors (Narayanaswamy et al, 2017). In turn, they usually trade at better credit ratings, which are determined by a credit rating agency. The unit price and the minimum buy-in for municipal bonds are usually high providing a high threshold for potential investors. Municipal bonds are further categorised as General Obligations Bond (repayment via tax revenues) and Revenue Bond (repayment via revenues from the project).

Pooling Municipal debt to issue municipal bonds. In comparison to big cities, the cost of borrowing for smaller municipalities can be particularly high. By pooling municipal debts with other small municipalities, the overall borrowing cost can be drastically reduced. Municipal bonds on the pooled municipal debts are then issued by the local governments and are purchased by a bank specifically authorised by the national or state statute. The bank then pools all the bonds purchased and issues them at the national bond market. Financing authorities can then gain greater access to national and international capital markets with higher credit ratings, and lower credit risk for each individual Municipality (UN Habitat, 2009).

Advantages: These bonds allow the municipality to raise funds for public projects either independently or through coordination with bond agencies. As municipal bonds have very low-interest rates compared to other financings methods, they provide access to finance at a price that is lower than that of commercial debt securities. Comparing bonds and debt instruments such as loans, bonds usually raise larger sums, and the application of proceeds greatly depends on its stipulations. Municipal bonds can be used more independently for the purposes of covering a bigger portfolio, project or range of projects, therefore, permitting the project management to operate the project with more flexibility and independence in decision-making and capital allocations.   

Disadvantages: Issuing municipal bonds may require extensive and costly preparation, such as obtaining a credit rating, acquiring approval from national securities authorities, and consulting with investment brokers, making these more suitable to larger municipalities or a collective of smaller ones. For this reason, many countries have municipal bond agencies, which aggregate debt from multiple municipalities, issue bonds, and sell them in the financial markets. With a high credit rating, agencies can raise capital for municipalities at a lower cost than would be possible if the municipalities issued the bonds themselves. Agencies of this kind are located in Sweden, Finland, France, Denmark, Switzerland, UK, and the Netherlands (ManagEnergy, 2017).

Projects that can be financed with this model: Most municipalities with access to a bond agency  and a good credit rating can apply this model and use the proceeds according to stipulations for example for large infrastructure projects or a portfolio under a certain topic.