What are municipal bonds?

Municipal bonds (“muni bonds”) are debt securities issued by state and local governments, or their authorized agencies, to borrow or raise money for public purposes such as building schools, highways, or hospitals. When you purchase a municipal bond, you lend money to the "issuer" (i.e. , the government entity that issued the bond), which, in turn, pays a set amount of interest while you hold the bond and returns your principal investment on a specified maturity date.

A primary feature of many municipal bonds is that the interest income an investor receives is generally exempt from federal income tax. The interest may also be exempt from state and local taxes if the investor lives in the state where the bond is issued. Municipal bonds, therefore, also are known as tax-exempt bonds.

Because they offer tax-free income, municipal bonds generally have annual yields below those of corporate bonds or U.S. Treasury bonds. These low yields allow state and local governments to borrow money for ... more.

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