Municipal Bonds

A debt security issued by a state and local governments.  These entities will borrow money from investors who are seeking to take advantage of the tax-exempt nature of the municipal bonds.  “Munis” as they are called help fund state projects such as roads, bridges, or schools.  Municipal bonds are also considered very safe investments as they are backed by state or local government institutions.  These investments are particularly popular with people in higher tax brackets because they are usually exempt from both federal and state taxes (if an investor buys munis issued by the state in which she is resident).  Municipal bonds vary widely in maturity.  Maturities range up to 30 years.

There are basically two types of municipal bonds.  These are general obligation bonds, which are backed by the “full faith and credit” (i.e. the taxing power) of the issuer, and revenue bonds, which are issued to finance particular project and are backed either by the revenues from that project or by the municipal agency operating the project.  Revenue bonds are riskier in terms of default than general obligation bonds.