Municipal Bond
Quick Definition
A debt security issued by a state, city, or local government, typically offering interest income exempt from federal (and sometimes state) income tax.
Key Takeaways
- Interest is typically exempt from federal income tax
- In-state munis may also be exempt from state and local taxes
- GO bonds backed by taxing power; revenue bonds by project income
- The U.S. municipal bond market exceeds $4 trillion
What Is Municipal Bond?
Municipal bonds ("munis") are debt securities issued by states, cities, counties, and other governmental entities to finance public projects such as schools, highways, hospitals, and infrastructure. Their primary attraction is tax-exempt interest: coupon payments are generally exempt from federal income tax and may also be exempt from state and local taxes if the investor resides in the issuing state. This tax advantage makes munis particularly attractive for investors in high tax brackets. General obligation (GO) bonds are backed by the full taxing power of the issuer, while revenue bonds are repaid from specific project revenues (tolls, utility fees, etc.). The municipal bond market exceeds $4 trillion in the United States.
Municipal Bond Example
- 1A California resident in the 37% federal bracket earns 3.5% tax-free from a CA muni, equivalent to about 5.56% from a taxable bond
- 2New York City issued $1 billion in GO bonds to fund school construction, backed by the city's property tax revenue
Related Terms
Revenue Bond
A municipal bond repaid from the income generated by a specific project or facility, such as tolls, fees, or utility charges.
Bond Rating
A credit quality grade assigned by rating agencies (S&P, Moody's, Fitch) that assesses the issuer's ability to repay principal and interest.
Bond
A fixed-income debt security where investors loan money to an issuer in exchange for regular interest payments and return of principal at maturity.
Treasury Bond (T-Bond)
A long-term U.S. government debt security with a maturity of 20 or 30 years, paying semiannual coupon interest.
Yield Curve
A graphical representation of interest rates across different maturities for bonds of similar credit quality, typically U.S. Treasuries.
Coupon Rate
The annual interest rate stated on a bond, expressed as a percentage of face value, that determines the periodic coupon payments.
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