what is a municipal bond 
the term municipal bond refers to a type of debt security issued by local county and state governments they are commonly offered to pay for capital expenditures including the construction of highways bridges or schools municipal bonds act like loans with bondholders becoming creditors in exchange for borrowed capital bondholders investors are promised interest on their principal balance the latter being repaid by the maturity date municipal bonds are often exempt from most taxes which makes them attractive to people in higher income tax brackets types of municipal bonds include general obligation and revenue bonds investopedia jake shiunderstanding municipal bondsa municipal bond is a debt obligation issued by a nonprofit organization a private sector corporation or another public entity using the loan for public projects such as constructing schools hospitals and highways municipal bonds which are also known as muni bonds or munis can generate tax free income for qualified residents but pay lower coupon interest rates as a result compared with taxable bonds types of municipal bondsa municipal bond is categorized based on the source of its interest payments and principal repayments a bond can be structured in different ways offering various benefits risks and tax treatments income generated by a municipal bond may be taxable for example a municipality may issue a bond not qualified for federal tax exemption resulting in the generated income being subject to federal taxes the value of municipal bonds outstanding as of q4 2023 1risks of municipal bondsdefault risk is low for municipal bonds compared with corporate bonds however revenue bonds are more vulnerable to changes in consumer tastes or general economic downturns than go bonds for example a facility delivering water treating sewage or providing other fundamental services has more dependable revenue than a park s rentable shelter area as a fixed income security the market price of a municipal bond fluctuates with changes in interest rates when interest rates rise bond prices decline when interest rates decline bond prices rise in addition a bond with a longer maturity is more susceptible to interest rate changes than a bond with a shorter maturity causing even greater changes in the municipal bond investor s income furthermore the majority of municipal bonds are illiquid an investor needing immediate cash has to sell other securities instead many municipal bonds carry call provisions allowing the issuer to redeem the bond prior to the maturity date an issuer typically calls a bond when interest rates drop and reissues municipal bonds at a lower interest rate when a bond is called investors lose income from interest payments and face reinvesting in a bond with a lower return 