Which financial instrument is typically issued by a local government or its agencies to raise capital?

• A. Municipal bond
• B. Corporate bond
• C. Mutual fund
• D. Certificate of deposit

Answer: (A)

This item tests recognizing the debt instrument used by local governments to raise funds for public projects. The instrument issued by a city, county, or their agencies is a municipal bond. Investors lend money to the government entity in exchange for periodic interest payments and the return of principal at maturity. A key feature is the tax advantage: interest on many municipal bonds is exempt from federal income tax, and may also be exempt from state and local taxes for residents of the issuing state, making them particularly attractive to certain investors.

There are variations, such as general obligation bonds backed by the issuer’s taxing power or revenue bonds backed by a specific project’s revenue (like tolls or utility income). These help the government finance infrastructure and services without raising taxes immediately.

Other options don’t fit because corporate bonds are issued by private companies, not local governments; mutual funds are pooled investment vehicles rather than debt issued to raise capital; and certificates of deposit are bank-issued time deposits, not instruments used by local governments to fund public projects.