The benefits of municipal bonds are similar to other bonds, with one key difference: municipal bonds typically pay interest that’s exempt from taxes. If you buy a municipal bond issued in your state of residence, you generally avoid all forms of taxation on the bond’s interest.
Municipal bonds are generally considered safe, especially general obligation (G.O.) bonds. As we discussed previously, there were only 21 G.O. bond defaults from 1970 to 2016. A major reason is the taxing authority of municipalities. Taxes must be paid, and municipalities rarely default on bonds backed by taxes.
Revenue bonds are also generally safe, but defaults are more common than with G.O. bonds.
Municipal bonds can also appeal to investors who want to support their local area. Money lent to cities and states is used to fund projects that directly benefit residents, such as roads, schools, parks, airports, universities, and economic development.
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