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What are municipal bonds?

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Quick Answer

Municipal bonds are an investment that is backed by the government via a state, city or county and are exempt from any kind of federal income tax, according to the U.S. Securities and Exchange Commission. Municipal bonds are often used to pay for highways, schools, sewer systems and sometimes hospitals or non-profit organizations.

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Full Answer

There are many risks with a municipal bond investment including call risk, credit risk, interest rate risk, inflation risk and liquidity risk as well as potential problems with broker compensation and tax implications. Before taking out a municipal bond, investors can review the Electronic Municipal Market Access website for the most up-to-date information, notes the U.S. Securities and Exchange Commission.

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