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 tax-exempt bond to build a new school or a new playground. They are called tax-exempt bonds because they are exempt from federal income taxes and sometimes from state and local taxes as well. Tax-exempt bonds usually pay lower
coupons than
corporate bonds, but because the
yield is tax-free, the
after-tax basis may be higher for the tax-exempt bond.
Risk varies according to the municipality and the particular type of bond.