Legal Definitions - municipal bonds

A municipal bond is a type of loan that is issued by state, municipal, or county governments to fund their operations. These bonds are also known as "muni bonds" or "munis." The money raised from the sale of municipal bonds is used to finance infrastructure projects, schools, hospitals, and other public projects.

Municipal bonds are a type of debt security that is sold through banks and financial institutions. Unlike other types of bonds, municipal bonds do not need to be registered with the Securities and Exchange Commission (SEC) because they are issued by local and state governments.

There are two types of municipal bonds:

• General obligation bonds: These bonds are not secured by any specific source of revenue. Instead, they rely on the local or state government's ability to tax residents to pay back the bondholders.
• Revenue bonds: These bonds are backed by a specific source of revenue, such as highway tolls or airport fees.

Municipal bonds are attractive to investors because they offer a relatively low risk of default and the interest earned on these bonds is tax-free. This is because the interest income is exempt from federal income tax and, in some cases, state and local taxes as well.

For example, a city might issue municipal bonds to fund the construction of a new school. The bondholders would receive interest payments over a set period of time, and the principal would be repaid at the end of the bond's term. The city would use the money raised from the sale of the bonds to pay for the construction of the school.

Another example would be a state issuing revenue bonds to fund the construction of a new highway. The bondholders would receive interest payments from the revenue generated by the tolls collected on the highway. The state would use the money raised from the sale of the bonds to pay for the construction of the highway.