A municipal bond, commonly known as a muni, is a bond issued by state or local governments, or entities they create such as authorities and special districts. In the United States, interest income received by holders of municipal bonds is often, but not always, exempt from federal and state income taxation.

Are muni bonds a good investment?

A: Though they are typically among the safer investments, municipal bonds do carry risks. Beyond the slim but real possibility of default, bonds can lose value if the issuer's credit rating is downgraded. Also, as with any fixed income investment, inflation can erode the purchasing power of future income.

What do municipal bonds pay for?

Municipal bonds are debt securities issued by states, cities, counties and other governmental entities to fund day-to-day obligations and to finance capital projects such as building schools, highways or sewer systems.