Municipal bonds (or “munis” for short) are debt securities issued by states, their political subdivisions (such as cities, towns, counties, and school districts), their agencies and instrumentalities (such as housing, health care, airport, port, and economic development authorities and agencies) and U.S. territories (such as the U.S. Virgin Islands, Guam, and Puerto Rico).  Municipal bonds are issued for a variety of purposes, including to finance public infrastructure projects, such as schools, highways, and water systems; to provide funds for day-to-day government needs; and to finance qualifying projects by private entities, such as hospitals, colleges, multi-family housing, and power and energy infrastructure.

The two most common types of municipal bonds are general obligation bonds (bonds backed by the “full faith and credit” of the issuer) and revenue bonds (bonds backed by the revenues from a specific project or source).  In addition, municipal borrowers sometimes issue bonds on behalf of private entities such as non-profit colleges or hospitals.  These “conduit” borrowers typically agree to repay the municipal issuer, who pays the interest and principal on the bonds.

Investors who buy municipal bonds face a number of risks, including: call risk, credit risk, inflation risk, interest rate risk, and liquidity risk.  For additional information regarding each of these risks, as well as more information about municipal bonds generally, please review our investor bulletins: Municipal Bonds – An Overview, The Municipal Securities Market, and Municipal Bonds – Asset Allocation, Diversification, and Risk.