Municipal Bond [Muni]

Municipal bonds (munis) are debt securities issued by states, cities, counties, and other governmental entities to fund public projects like schools, highways, hospitals, and utilities. The key feature is federal tax exemption – interest income is exempt from federal taxes and often state taxes for residents. For example, a California resident buying California munis pays no federal or state tax on interest. This tax advantage means munis can offer lower yields than taxable bonds while providing similar after-tax returns. For an investor in the 37% tax bracket, a 3% muni is equivalent to a 4.76% taxable bond. There are two main types: general obligation bonds (backed by taxing power) and revenue bonds (backed by project revenues). Munis are rated by credit agencies, with defaults historically rare (0.1% annually). The municipal market totals $4 trillion, crucial for infrastructure funding. Tax reform and state fiscal health significantly impact muni markets.