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What are Municipal Bonds?
Municipal bonds are debt securities issued by local governments, municipalities, or public agencies to finance public projects such as schools, roads, hospitals, and infrastructure.
Definition
A municipal bond (“muni bond”) is a fixed-income security issued by a city, state, or local authority to raise funds for public-interest projects, with interest payments often exempt from certain taxes.
Key Takeaways
- Issued by local governments for public projects.
- Often come with tax advantages for investors.
- Provide steady income at relatively low risk.
Understanding Municipal Bonds
Municipal bonds serve as a primary financing tool for government bodies. Investors who purchase muni bonds lend money to the issuer in exchange for periodic interest payments and return of principal at maturity.
Municipal bonds are generally divided into two categories:
- General Obligation (GO) Bonds – Backed by the full taxing power of the issuing government.
- Revenue Bonds – Repaid from revenues generated by specific projects (e.g., toll roads, utilities).
They are popular among conservative investors seeking tax-efficient income.
Formula (If Applicable)
Tax-Equivalent Yield:
[ \text{Tax-Equivalent Yield} = \frac{\text{Tax-Free Yield}}{1 – \text{Tax Rate}} ]
Real-World Example
A city may issue municipal bonds to fund the construction of a new bridge. Investors receive interest payments, often exempt from national or local taxes.
Importance in Business or Economics
Municipal bonds:
- Finance essential public infrastructure.
- Support economic development.
- Offer stable investment options for individuals and institutions.
Types or Variations
- General Obligation Bonds
- Revenue Bonds
- Taxable Municipal Bonds
- Municipal Notes
Related Terms
- Fixed-Income Securities
- Government Bonds
- Public Finance
Sources and Further Reading
- Investopedia – Municipal Bonds
- U.S. SEC – Municipal Securities
- Moody’s & S&P – Bond Ratings
Quick Reference
- Debt securities for public projects.
- Often tax-exempt.
- Typically low risk with steady returns.
Frequently Asked Questions (FAQs)
Are municipal bonds tax-free?
Often yes, but depends on jurisdiction.
Are muni bonds safe?
Generally, yes, GO bonds are especially safe.
Who invests in municipal bonds?
Individuals seeking tax-advantaged income and institutions focused on low-risk assets.
