What Are Bonds And Why Are They Used? Government agencies sell
bonds to finance a variety of projects and activities. When
investors purchase bonds, they essentially lend money to the
bond seller, or issuer. In this way, a bond is similar to an
IOU. In return for the bond proceeds, the issuer promises to pay
the investor a specified rate of interest over the life of the
bond and to repay the bond when it comes due. Bonds issued by
government agencies are called municipal bonds. The funds are
used to finance projects that benefit the community such as
roads, schools, bridges, sewers, parks, water treatment or low-
income housing. Most bonds issued by government agencies are
tax-exempt. This means bondholders do not have to pay federal
income taxes and, in most cases, state income taxes on the
interest they earn. In addition to the tax-exempt status,
investors benefit from the taxing authority of the government
agencies. That authority strengthens the security of municipal
bonds, giving investors greater assuran