Although the municipal bond market is not unique to the United States, it does represent a major source of private finance for state and local government. The following is a brief overview of the municipal bond market and the types of bonds that may be issued. This summary does not attempt to substitute for the complex rules, set by the US Internal Revenue Service (IRS), that govern this market.6
The market is not new: municipalities started to issue bonds to fund capital developments, such as railways, in the early 1800s. Nowadays the key driver for the market is the fact that the interest paid to bondholders is exempt from federal and state income tax. The investor universe is primarily retail investors: individuals investing either directly or through mutual funds.