Municipal bonds are debt securities issued by state or local governments or their agencies to finance general governmental activities or special projects.
For example, a state may float a bond to fund the construction of highways or college dormitories.
The interest a muni pays is usually exempt from federal income taxes, and is also exempt from state and local income taxes if you live in the state where it was issued.
However, any capital gains you realize from selling a muni are taxable, and some muni interest may be vulnerable to the alternative minimum tax (AMT).
Munis generally pay interest at a lower rate than similarly rated corporate bonds of the same term. However, they appeal to investors in the highest tax brackets, who may benefit most from the tax-exempt income.
- Browse Related Terms: Bond, U.S. Savings, Inflation-protected security (TIPS), Long bond, Municipal bond (muni), Risk-free return, Treasury bill (T-bill), Treasury bond, Treasury Direct, Treasury inflation-protected securities (TIPS), Treasury note, US Treasury bond