What Are Municipal Bonds in Finance?

A municipal bond is a debt security.

Consider a municipal bond if you want to preserve your capital while making a tax-free income stream. If you purchase a municipal bond, you are lending money to a government entity that issued the bond. According to Investopedia, a municipal bond is also known as a "muni."

Function

The Securities and Exchange Commission reveals that states, cities, counties and other types of government entities issue municipal bonds to raise money for public reasons, such as building highways, hospitals, schools, sewer systems and other projects.

Effects

After purchasing a municipal bond, the government entity makes a promise to pay the specific amount of interest, according to the Securities and Exchange Commission. Interest is typically provided semiannually. On a specific maturity date, the entity returns your money, also known as "principal."

Benefits

Investopedia states that municipal bonds are purchased for their advantageous tax implications. Municipal bonds are attractive to those in high-income tax brackets. If you live in the state where the bond is issued, interest may be exempt from state and local taxes, according to the Securities and Exchange Commission.

References

• Investopedia: The Basics of Municipal Bonds
• Investopedia: Municipal Bond Definition
• Securities and Exchange Commission: Bonds, Municipal

Resources

• Securities Industry and Financial Markets Association: Types of Bonds