Tax-Free Municipal Bonds

Tax-free municipal bonds are fixed-income investments issued by cities, counties, states, villages, state agencies or special districts. The two main types of tax-free municipal bonds are general obligation bonds and revenue bonds.

General obligation bonds are backed by the taxing power of the issuer. For example, a bond that is being issued to build a new high school may be a general obligation of the town where the school is located. The property taxes paid by residents will pay interest and principal to bondholders.

An issue sold to improve a water system is an example of a revenue bond. The individuals using the water system pay user charges, which are used to operate and maintain the water system. Revenues from the water system pay interest and principal to bondholders.

To provide income that is free from federal income tax and, in some cases, state and local income tax.

Municipal bonds are well suited for income-oriented investors seeking tax-free income.

Product Features

  • Regular Income - Tax-free municipal bonds offer a fixed rate of return that is payable every six months.
  • Credit Quality - Many tax-free municipal bonds are insured. This insurance provides for the timely payment of principal and interest. However, insurance does not eliminate market risk.
  • Liquidity - Tax-free municipal bonds may be sold on any business day at their current market value. This may be equal to, more, or less than the amount originally invested.
  • Call Protection - When initially offered, tax-free municipal bonds usually provide protection for a specific period of time against the bonds being redeemed or called prior to maturity.
  • Tax Advantage - The interest earned from municipal bonds is free from federal income tax and, in some cases, state and local tax. Municipal bonds may be subject to state, local or the alternative minimum tax.

For a complete listing of specific issuer information, such as official statements, issuer disclosures and municipal bond pricing, please visit the MSRB's Electronic Municipal Market Access (EMMA) at

For more information on municipal bonds, please contact your local financial advisor.

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