Municipal Bond

A debt obligation issued by a state, state agency or authority, or a political subdivision, such as county, city, town or village. They may be issued for general governmental needs or special projects. Issuance must be approved by referendum or by an electoral body. Before the Tax Reform Act of 1986, interest paid on municipal bonds was exempt from federal income tax and state and local income tax within the issuing state. The terms municipal and tax-exempt were synonymous. However, the Act separated municipal bonds into two broad groups–public purpose bonds and private purpose bonds. Public purpose bonds are tax-exempt and may be issued without limitations. Private purpose bonds are taxable unless specifically exempted. The difference between public and private purpose bonds is based on the percentage in which the bonds benefit private parties

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