Municipal Bond
A debt security issued by a city, county, state, or other government entity to finance capital expenditures. Interest income is generally exempt from federal income tax.
How It Works
The tax exemption on municipal bond interest makes "munis" attractive to investors in high tax brackets and allows governments to borrow at lower rates than corporations. The municipal bond market is approximately $4 trillion in size. Bonds are rated by agencies (Moody's, S&P, Fitch), and the rating determines the interest rate the government must pay. Municipal defaults are rare but not unheard of — Detroit (2013), Stockton (2012), and Jefferson County, Alabama (2011) are notable examples.
Related Terms
- General Obligation Bond (GO Bond) — A municipal bond backed by the full faith, credit, and taxing power of the city — meaning the city pledges to raise taxes if necessary to repay bondholders.
- Revenue Bond — A municipal bond repaid from a specific revenue stream (like water fees or toll road revenue) rather than the city's general taxing power.
- Credit Rating (Municipal) — An assessment by a rating agency (Moody's, S&P, Fitch) of a city's ability and willingness to repay its debt obligations. Higher ratings mean lower borrowing costs.
- Debt Service — The annual cost of repaying outstanding municipal debt — including both principal payments and interest on bonds and other borrowings.
About This Definition
This definition is part of the CitySpend Municipal Finance Glossary — 59 terms explaining how city governments fund and manage public services. All definitions are written in plain language for taxpayers, journalists, students, and municipal bond investors.