Municipal Bond

What it is:

A municipal bond, commonly referred to as a "muni" bond, is a debt security issued by a state or local government.

How it works/Example:

The purchaser of a municipal bond is effectively loaning money to a government entity, which will make a predetermined number of interest and principal payments to the purchaser. Issuers typically use municipal bond proceeds to finance day-to-day operating activities or capital expenditures for the public good such as road, hospital, school, or infrastructure projects.

There are many kinds of municipal bonds, but the two most prominent are general obligation bonds and revenue bonds. General obligation bonds are repaid with taxes collected by the issuer. They are unsecured and generally have maturities of at least 10 years. Revenue bonds are repaid with the revenue generated by the projects financed with the bond proceeds (such as a toll road).

Municipal bonds may be purchased directly from the issuer at the time of issuance or in the secondary market through a broker/dealer. One of the most popular ways to invest in municipal bonds is by purchasing shares of a municipal bond fund.

Why it Matters:

One of the biggest advantages of investing in municipal bonds is their tax-advantaged status. That means many investors in high tax brackets particularly benefit from investing in municipal bonds. Furthermore, since they are issued by government entities, municipal bonds are more likely to repay their debts. This low-risk makes the bonds attractive to conservative investors. Finally, some investors feel a sense of civic pride by investing in projects that will positively affect the community in which they live.

Best execution refers to the imperative that a broker, market maker, or other agent acting on behalf of an investor is obligated to execute the investor's order in a way that is most advantageous to the investor rather than the agent.