What is a municipal bond?

• A. An security issued by a local government, or its agencies.
• B. A security issued by the federal government.
• C. A private loan between individuals.
• D. An insurance policy with tax benefits.

Answer: (A)

Municipal bonds are debt securities issued by local governments or their agencies to raise funds for public projects such as schools, roads, or water systems. When you buy one, you’re lending money to the issuer and receiving periodic interest payments plus the return of principal at maturity. A key feature is their tax treatment: the interest is typically exempt from federal income tax and often from state and local taxes for residents of the issuing jurisdiction, which can make them especially attractive to investors in higher tax brackets. This tax advantage helps distinguish them from securities issued by the federal government, which do not carry the same tax-exempt status, and from private loans or personal loans, which are not issued by government entities and lack the same purpose or tax benefits. Municipal bonds can be general obligation bonds, backed by the issuer’s taxing power, or revenue bonds, backed by revenues from a specific project.