MUNI BOND
Back to GlossaryDefinition
A debt security issued by a state, municipality or county to finance its capital expenditures, including the construction of highways, bridges or schools.
Summary
A municipal bond (muni bond) is a debt security issued by state and local governments to finance public projects like schools, highways, and hospitals. When you buy a muni bond, you're essentially lending money to the government entity, which promises to pay you back with interest. The key advantage is that the interest income is typically exempt from federal taxes, and sometimes state and local taxes too, making them attractive to investors in higher tax brackets.
Usage Context
Essential when studying fixed-income investments, tax-advantaged securities, government finance, portfolio construction for high-income investors, and comparing different types of bonds in investment analysis.
Common Confusions
- Thinking all muni bonds are completely tax-free (some may be subject to AMT)
- Confusing municipal bonds with Treasury bonds
- Assuming all municipal bonds have the same risk level
- Not understanding that tax benefits depend on your tax bracket
- Believing municipal bonds can never default
