What Are Municipal Bonds?

Introduction

The new school in your town, the bridge you drive across, or your local water system may have been paid for with municipal bonds. These bonds let investors lend money to local governments, and they come with some unique benefits.

What Are Municipal Bonds?

Municipal bonds, often called munis, are loans that investors make to states, cities, counties, and other local governments. In return, the government pays interest and returns the original amount when the bond matures. The money raised funds public projects like schools, highways, hospitals, and parks.

The Tax Advantage

One of the biggest perks of municipal bonds is that the interest is usually exempt from federal income tax. If you buy bonds from your own state, the interest may also be free from state taxes. This makes munis especially attractive to people in high tax brackets.

Risks to Consider

Municipal bonds are generally considered safe, and defaults are rare. However, some cities have faced financial trouble, such as Detroit, which filed for bankruptcy in 2013. Like other bonds, munis also lose value when interest rates rise. Investors can check credit ratings to judge how risky a bond is.

Conclusion

Municipal bonds let you earn interest while helping build your community. They are a great example of how investing can support the places where we live!