A short-term
debt security issued by a local or state government. Generally speaking, a municipal note has a maturity from three months to three years. Municipal notes are usually used to raise
capital for improvements in infrastructure or other aspects of the municipality. For example, a city or school district may issue a note to build a new park or a new playground. Municipal notes are exempt from
federal income taxes and sometimes from state and local taxes as well. Municipal notes usually pay lower
coupons than
corporate notes with similar
maturities, but because the
yield is
tax-free, the
after-tax basis may be higher for a municipal bond.
Risk varies with the municipality and the particular type of municipal note. See also:
Tax Anticipation Note.