What are municipal bonds also known as?

Municipal bonds are primarily known as tax-exempt investments issued by local governments. These bonds are created to raise funds for public projects, such as the construction of schools, highways, and other infrastructure. The key feature of municipal bonds is that the interest income earned by bondholders is often exempt from federal income tax and, in some cases, state and local taxes as well. This tax advantage makes them an attractive investment option for individuals in higher tax brackets.

This distinct characteristic highlights the role of municipal bonds in financing public services while providing investors with favorable tax treatment. Unlike corporate bonds, which are issued by private companies and do not typically offer tax exemptions, municipal bonds represent a debt obligation of state or local governments. Therefore, understanding the unique classification of municipal bonds helps investors make informed choices about their portfolios, particularly regarding tax efficiency.