What are Municipal Bonds

When cities need funds to finance certain projects that serve a civic duty and the public good, municipal bonds may be issued to supplement revenues to pay for these projects. Bondholders lend issuers a loan that is expected to be paid back at face value by a certain date. That date is called the maturity date. Issuers pay interest on the bond which is generally exempt from federal income taxes and may also be exempt from state and local taxes if you reside in the state where the bond is issued. These interest payments are usually paid every six months through the maturity date. Given the tax benefits, the interest rate for municipal bonds is usually lower than on taxable fixed-income securities such as corporate bonds.