Municipal bonds, or munis, are debt securities issued by state and local governments to finance public projects such as schools, roads, and hospitals. They are considered a relatively safe investment due to the taxing power of the issuing entity.
Key Features of Municipal Bonds
- Tax Advantages: One of the most attractive features of municipal bonds is their tax-exempt status. Interest earned is typically exempt from federal income taxes, and may also be exempt from state and local taxes if the bondholder resides in the issuing state.
- Credit Quality: Municipal bonds are generally considered to be of high credit quality. Many are insured, further reducing the risk of default.
- Variety of Maturities: Munis are available with a wide range of maturities, from short-term notes to long-term bonds, allowing investors to match their investment horizon.
- Income Stream: Municipal bonds provide a steady stream of income, making them suitable for investors seeking regular cash flow.
Types of Municipal Bonds
General Obligation Bonds
These bonds are backed by the full faith and credit of the issuing government, meaning they are supported by the government’s taxing power.
Revenue Bonds
Revenue bonds are backed by the revenue generated from a specific project, such as a toll road or a water system.
Who Should Invest in Municipal Bonds?
Municipal bonds are often favored by investors in higher tax brackets who can benefit most from the tax-exempt interest. They are also suitable for those seeking a stable, low-risk investment with a predictable income stream.
