Municipal Bonds
What Is Municipal Bonds?
Municipal bonds are debt securities issued by state, city, or local governments to finance public projects such as schools, highways, and infrastructure improvements.
Investors who purchase municipal bonds are essentially lending money to the government in exchange for periodic interest payments.
Why It Matters
Municipal bonds are attractive to many investors because the interest they generate may be exempt from federal income tax and sometimes state or local taxes.
They can provide a relatively stable source of investment income.
How Municipal Bonds Works
Government entities issue municipal bonds to raise funds for public projects.
Investors purchase the bonds and receive:
- periodic interest payments
- repayment of the principal amount when the bond matures
Interest income from many municipal bonds is tax-exempt at the federal level.
Example
A city may issue municipal bonds to fund the construction of a new school. Investors who buy the bonds receive interest payments over time.
Municipal Bonds vs Corporate Bonds
- Municipal bonds are issued by government entities.
- Corporate bonds are issued by private companies.
FAQs About Municipal Bonds
Are municipal bond interest payments taxable?
Many are exempt from federal income tax.
Are municipal bonds considered safe investments?
They are generally considered lower risk but still carry some risk.
Who issues municipal bonds?
State and local governments.
Related Terms
