Municipal bonds
Municipal bonds, or "munis," are debt securities issued by local governments (cities, states, counties) to fund public projects like schools, roads, and infrastructure. When you buy a municipal bond, you're essentially lending money to the government in exchange for regular interest payments and the return of your principal (the amount you invested) when the bond matures.
Key Points:
Interest Payments: You receive periodic interest (usually semi-annually).
Tax Benefits: Most municipal bonds are exempt from federal taxes, and if you live in the state issuing the bond, they may also be exempt from state and local taxes.
Maturity: Municipal bonds have a fixed term, typically ranging from 1 to 30 years.
Low Risk: Generally considered safer investments because they are backed by government entities.
EXAMPLE:
Suppose your city wants to build a new high school and needs $10 million. They issue 10-year municipal bonds with a 3% interest rate. If you invest $10,000, the city will pay you $300 a year (3% of $10,000) in interest, typically in two payments of $150. After 10 years, the city will return your original $10,000 investment.
This is a relatively low-risk investment, especially if the issuing government has a strong financial standing. However, like any bond, the risk is tied to the issuer's ability to repay, so municipal bonds from financially struggling areas can carry more risk.
Municipal bonds are popular with investors looking for tax-free income and safe, long-term investment opportunities