A
bond issued by a local or state government. Municipal bonds 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 bond to build a new school or a new playground. Municipal bonds are exempt from
federal income taxes and sometimes from state and local taxes as well. Municipals usually
pay lower
coupons than
corporate bonds, 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 bond. It is sometimes called a municipal improvement certificate.