Municipal Bond

Written By:
Paul Tracy
Updated August 9, 2020

What is a Municipal Bond?

A municipal bond, commonly referred to as a "muni" bond, is a debt security issued by a state or local government.

How Does a Municipal Bond Work?

The purchaser of a municipal bond is effectively loaning money to a government entity, which will make a predetermined number of interest and principal payments to the purchaser. Issuers typically use municipal bond proceeds to finance day-to-day operating activities or capital expenditures for the public good such as road, hospital, school, or infrastructure projects.

There are many kinds of municipal bonds, but the two most prominent are general obligation bonds and revenue bonds. General obligation bonds are repaid with taxes collected by the issuer. They are unsecured and generally have maturities of at least 10 years. Revenue bonds are repaid with the revenue generated by the projects financed with the bond proceeds (such as a toll road).

Municipal bonds may be purchased directly from the issuer at the time of issuance or in the secondary market through a broker/dealer. One of the most popular ways to invest in municipal bonds is by purchasing shares of a municipal bond fund.

Why Does a Municipal Bond Matter?

One of the biggest advantages of investing in municipal bonds is their tax-advantaged status. That means many investors in high tax brackets particularly benefit from investing in municipal bonds. Furthermore, since they are issued by government entities, municipal bonds are more likely to repay their debts. This low-risk makes the bonds attractive to conservative investors. Finally, some investors feel a sense of civic pride by investing in projects that will positively affect the community in which they live.