Municipal bonds are debt securities that states, cities, counties, and other governmental entities issue to raise money for public purposes - such as building schools, highways, hospitals, sewer systems, and other special projects. A primary feature of many municipal securities is that the interest you receive is generally exempt from federal income tax. The interest may also be exempt from state and local taxes if you live in the state where the bond is issued.
When you purchase a municipal bond, you lend money to the "issuer," the government entity that issued the bond. In exchange, the government entity promises to pay you a specified amount of interest, usually semiannually, and return your money, also known as "principal," on a specified maturity date.