Municipal bonds are issued by state and local governments to raise money. General obligation ("GO") bonds, the safest type, pay lenders from tax revenues. Revenue bonds are used to finance specific projects like a stadium or highway and lenders are paid from the revenues that the project generates. Since states cannot declare bankruptcy and it's extremely rare for a city to do so, municipal bonds tend to be safe investments, especially considering that a local government can always raise taxes to pay back GO bond investors. Municipal bonds pay higher interest rates than Treasury securities and pay about the same that a risky corporate bond would pay.
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