Municipal bonds are issued by any form of goverment agency that is lower than state level for e.g. cities and counties. The primary attraction of municipal bonds is that the interest generated is generally exempt from federal and state taxes. To compensate for this, the interest paid is generally lower than what you would receive from other investment vehicles. Sometimes however municipal bonds may not be tax exempt.Municipal bonds are generally used by local goverment entities to raise funds for projects and the bond terms can be up to 40 years. Municipal bonds can be purchased either directly from the issuer (primary market) or on the secondary market.
Municipal bonds were first issued in the US in the early 1800s when rapid city growth dictated the need for local governments to start financing their debt.
Municipal bonds can be general obligation bonds where the principal and interest are secured by the issuing government agencies taxation power. Revenue bonds on the other hand are those where the principal and interest are secured by revenues from special projects being financed by these bonds. This could be tolls to build roads & bridges or other public projects.