Municipal Bond
A municipal bond (muni) is a debt security issued by a state, city, or county to finance public projects, with interest typically exempt from federal income tax.
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Exam Tip
GO bonds = taxes backing. Revenue bonds = project income backing. Know the difference!
What is a Municipal Bond?
Municipal bonds are issued by state and local governments to fund public projects like schools, highways, and hospitals. Their key advantage is tax-exempt interest income.
Types of Municipal Bonds
| Type | Backing | Risk Level |
|---|---|---|
| General Obligation (GO) | Full taxing power of issuer | Lower risk |
| Revenue Bond | Specific project revenue (tolls, fees) | Higher risk |
Tax Advantages
- Federal tax-exempt - Interest is not subject to federal income tax
- State tax-exempt - Often exempt if you live in the issuing state (triple tax-free)
- AMT consideration - Some private activity bonds subject to Alternative Minimum Tax
Who Should Buy Munis?
Municipal bonds are most beneficial for investors in high tax brackets. The tax-equivalent yield formula helps compare:
Tax-Equivalent Yield = Muni Yield Ć· (1 - Tax Rate)
Example: A 4% muni for someone in the 32% bracket = 4% Ć· 0.68 = 5.88% taxable equivalent
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