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Municipal bonds (“munis”) finance public projects such as roads, bridges, fire departments, libraries and schools. They also offer investors a way to generate tax-free income through interest payments from state and local governments. Municipal bonds are one low-risk strategy for limiting state and federal tax liability, especially for higher-earning investors.
Municipalities issue bonds when they need to raise money for a project. An investor buying a muni bond funds that particular project over a set period. The investor expects to receive interest or coupon payments (usually semiannually) and the initial principal back when the bond matures or the loan term ends. That’s because the higher your tax bracket, the more advantageous muni's tax-exempt benefits are.
