What type of debt is issued by state and local governments?

Municipal debt is a type of debt specifically issued by state and local governments to raise funds for various projects, such as building schools, highways, and other infrastructure needs. This kind of debt is often attractive to investors because it is typically exempt from federal income taxes, and sometimes from state and local taxes as well, which can enhance its appeal, particularly for investors in higher tax brackets.

Municipal debt can take the form of bonds, with the government promising to pay back the principal amount along with interest after a defined period. By issuing these bonds, municipalities can access funding without increasing taxes or making substantial cuts to services, making this a vital tool for public financing.

In contrast, corporate debt refers to borrowing by companies, subordinate debt refers to loans that are repaid after other debts in the event of bankruptcy, and secured debt involves loans backed by collateral. Each of these types does not pertain to the financing needs of state or local governments.