municipal bonds
Municipal bonds, often called “munis,” are debt securities issued by states, cities, counties, public authorities, and other state or local governmental entities. Issuers use municipal bonds to finance capital projects, such as schools, highways, and water or sewer systems, and to meet other governmental financing needs. When an investor buys a municipal bond, the investor lends money to the issuer in exchange for interest payments and repayment of principal at the bond’s maturity.
Many municipal bonds are exempt from registration under Securities Act § 3(a)(2). That registration exemption does not remove municipal bonds from all federal securities regulations. Federal antifraud provisions apply to purchases and sales of municipal securities and to municipal-issuer statements that are reasonably expected to reach investors or securities markets. The Municipal Securities Rulemaking Board (MSRB) writes rules governing brokers, dealers, municipal securities dealers, and municipal advisors in the municipal securities market, subject to oversight by the Securities and Exchange Commission (SEC).
For many covered primary offerings, SEC Rule 15c2-12 requires a participating underwriter to obtain and review an official statement that the issuer deems final. The underwriter must also reasonably determine that the issuer or another obligated person has agreed to provide specified annual financial information and notices of certain events to the MSRB. Investors can review official statements, continuing disclosures, trade data, and other municipal-securities information through the MSRB’s Electronic Municipal Market Access (EMMA) website.
The two most common types of municipal bonds are general obligation bonds and revenue bonds. A general obligation bond is typically backed by the issuer’s full faith, credit, and taxing power, although the precise payment source and priority can vary under state or local law and the bond’s terms. A revenue bond is payable from a specified source of revenue, such as tolls, utility charges, lease payments, or project revenues, rather than from the issuer’s general taxing power.
Some municipal bonds are issued through conduit financings, in which a governmental issuer issues bonds on behalf of a separate borrower, such as a nonprofit hospital, university, or housing organization. The conduit borrower is typically responsible for making the payments needed to repay bondholders, and the governmental issuer generally does not guarantee repayment.
Municipal bonds often receive favorable tax treatment. Under Internal Revenue Code § 103, gross income generally does not include interest on a state or local bond. However, the exclusion does not apply to a private activity bond that is not a qualified bond, an arbitrage bond, or a bond that fails applicable Internal Revenue Code § 149 requirements. Therefore, not all municipal-bond interest is exempt from federal income tax. State and local tax treatment can also vary depending on the bond, the issuing jurisdiction, and the investor’s residence.
Municipal bonds are not risk-free. Risks can include credit risk, default, interest-rate risk, call risk, inflation risk, and liquidity risk. Because the source of repayment varies among bonds, an official statement and continuing disclosures may help identify who is responsible for repayment, what revenues or taxes are pledged, and what risks may impact payment.
[Last reviewed in June of 2026 by the Wex Definitions Team]
Wex