Municipal Bond

A municipal bond is a debt security issued by a state, municipality, or local government to finance public projects, such as infrastructure, schools, or transportation. The bondholder lends money to the issuer in exchange for periodic interest payments and the return of the bond’s face value at maturity. Municipal bonds are often tax-exempt at the federal level and, in some cases, at the state or local level, making them attractive to investors seeking tax-efficient income.

Example

An investor buys a municipal bond issued by a city to fund the construction of a new public school, receiving tax-exempt interest payments over the bond’s term.