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A municipal bond is a loan you make to a state or local government, which they use to fund public projects.
In Depth
When you buy a municipal bond, you are essentially lending money to a city, county, or state. In return, the government promises to pay you back the original amount plus regular interest payments over a set period. A key benefit is that the interest earned on these bonds is often exempt from federal income tax, and sometimes state and local taxes too, especially if you live in the issuing state. This tax advantage makes them attractive to investors, particularly those in higher tax brackets.
Example
An investor might buy a municipal bond issued by their city to help fund the construction of a new public library.