What are municipal bonds?

• A. Bonds issued by private companies
• B. Municipal bonds are loans made by investors to a government
• C. Bonds guaranteed by the federal government
• D. Bonds issued by international organizations

Answer: (B)

Municipal bonds are debt securities issued by state and local governments to raise money for public projects. They work like loans: investors lend money to the government entity, which promises to pay interest over time and repay the principal at maturity. A key feature is that the interest is typically exempt from federal income tax, and may also be exempt from state and local taxes if you live in the issuing state. They are not issued by private companies (that would be corporate bonds) and are not guaranteed by the federal government (that describes U.S. Treasuries). Some municipal bonds are general obligation bonds backed by the government's taxing power, while others are revenue bonds backed by specific revenue streams.