A municipal bond is a form of debt issued by state, municipal, or county governments to finance its operations. They are also referred to as “muni bonds” or simply “munis.”
Local and state governments issue municipal bonds to fund infrastructure projects, schools, hospitals, and other projects to benefit the public good. Specifically, municipal bonds are a debt security sold generally through banks and financial institutions. Under section 3(a)(2) of the 1933 Securities Act, however, when local and state governments issue municipal bonds they generally do not need to register the bonds with the SEC.
Similar to many other forms of debt, municipal bonds have principal, interest, and maturity. The interest is relatively low, given the relatively low risk of default on municipal bonds. That is, local and state governments can generally be relied on to satisfy their obligations on municipal bonds because their source of revenue is their tax base. Furthermore, municipal bonds are attractive to investors because under section 103 of the Internal Revenue Code, the interest investors receive from the bonds is tax free.
Municipal bonds generally take two forms: 1) general obligation bonds, where the bonds are not secured by any specific source of revenue, but rather the local or state government’s general ability to tax residents to satisfy the municipal bonds; and 2) revenue bonds, which are not backed by the local or state government’s general taxing power but rather satisfy the bonds through revenues from a specific source, like, for example, highway tolls.
[Last updated in September of 2021 by the Wex Definitions Team]