Money invested in municipal bonds contributes to state and local projects, such as building roads or funding public schools. They’re often backed by the full faith and credit of the issuing municipality or have revenues pledged from the issuing municipality. Therefore, they’re higher quality and relatively safer than many other equity and fixed-income investments.
Because state and local governments issue these bonds to fund public projects, the interest they generate is exempt from federal income tax. In today’s low interest-rate environment, where income can be hard to find, this tax-free interest may help investors increase their income without additional tax burdens.
Municipal bonds can help provide a hedge against inflation. Why? Higher prices and incomes create greater revenue from higher property, income and sales taxes, potentially benefiting muni bonds investors.