What Are Municipal Bonds?

Municipal bonds are bonds issued by a state, city or other local government. Issuers of municipal bonds include cities, counties, publicly owned airports and seaports below the state level. Interest income received by holders of municipal bonds is exempted from tax.

The methods of issuing the debt are calculated by an extensive system of laws and regulations, which vary according to each state and the interest rate may be fixed or variable.

The issuer of a bond receives a cash payment at the time of issuing bonds to the investors who promises to pay cash payment over time. Repayment period can be for a few months or even years.

The issuer utilizes the profit from the proceed sale to pay for the capital projects or for other purposes. As most municipal bonds are exempted from tax, investors claim low rate of interest for other types of borrowing. This issuance of bonds attracts many municipal entities, as the burrowing rate is relatively lower in the open market than in other borrowing channels.

It is one of the several ways by which a city, state, and country can issue a debt. The methods of borrowing may be different in the eyes of the law but are similar to the municipal bonds.

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