Municipal bonds, or “munis” as we like to call them, can be thought of as a loan. They’re generally issued by state or local governments to finance long-term projects.
When you purchase a bond, you are lending to a large borrower, typically a government entity. The borrower makes a legal promise to repay the amount borrowed (the principal) plus interest. Munis are unique in that they can be issued as either taxable (like corporate bonds) or tax exempt where their interest is exempt from federal income tax, and in many cases, state and local taxes as well.