Municipal Bond

Municipal bonds, often called munis, are especially common in the United States, though local governments in other countries also issue bonds. Investors lend money to the local authority and receive regular interest and repayment at maturity.

Some municipal bonds are repaid from the issuer's general tax revenue; these are called general obligation bonds. Others are repaid from the income of a specific project, such as tolls from a bridge or fees from a water utility; these are called revenue bonds.

In the United States, interest on many municipal bonds is exempt from federal income tax and sometimes from state and local taxes too. This tax advantage means they can offer lower interest rates than taxable bonds while still being attractive to investors in higher tax brackets. For example, a tax-free yield of 3% may be worth more to some investors than a taxable yield of 4%.

Municipal bonds are generally considered fairly safe, though defaults do occur when local governments face serious financial difficulties.