A bond issued by a state or local government to fund public projects.
A municipal bond is a debt security issued by a state, city, or other local government to fund public projects like schools, roads, bridges, or water systems. Municipal bonds typically offer lower yields than corporate bonds but come with a significant tax advantage: interest is usually exempt from federal income tax and often state/local taxes (if you live in the issuing state). This tax-free status makes munis attractive to higher-income investors in high tax brackets. Credit risk varies based on the municipality's financial health; most munis are highly rated, but some municipalities face serious fiscal challenges. General obligation bonds are backed by the full faith and credit of the municipality; revenue bonds are backed by specific project revenues.