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Wade Hansen

This is a bond issued by a state, city, or local government. Municipalities issue bonds to raise capital for their day-to-day activities and for specific projects that they might be undertaking (such as developing local infrastructure like roads, sewers, parks, hospitals, etc). Interest on municipal bonds is generally exempt from federal taxes, and bonds bought by a resident of the state or other localities are typically exempt from taxes on the interest by the issuing body. Yields on municipal bonds are often lower than corporate or Treasury bonds with comparable maturities, because they have important tax-free advantages. Municipal bonds are considered safer, low-risk investments than corporate bonds, since a municipal government is much less likely to go bankrupt than a corporation. Some municipal bonds are insured by outside agencies, usually a monoline insurer, which promises to pay the interest and principal if the bond's issuer defaults.

Investing in Muni Bonds

Municipal bonds—often referred to as "munis"—are bonds that are issued by municipalities to raise money for projects ranging from road construction projects and new power plants to building parks and zoos.

Munis work no differently than any other bond. Munis have a face value, a coupon rate and a maturity date. However, munis do have one distinct advantage over other bonds—they provide tax-free earnings.

The Federal Government does not count earnings from munis as part of taxable income. This tax treatment helps incentivize individuals to invest in municipal bonds.

Muni Bond Funds

In a municipal bond fund like the Vanguard Intermediate-Term Tax-Exempt Fund Investor Shares (VWITX), proiding exposure to not one but hundreds of municipal bonds. This gives diversification at a relatively low cost.