State and Local Governments
This report expands on the topic of municipal bonds and discusses the different incentives attached to government bonds. These debt instruments are issued by states and government bodies to finance their investments and spending. In doing so, governments become lenders, which allows them to support specific sectors to help stimulate their economies. For example, how have some governments supported businesses during the coronavirus pandemic?
What Is Debt?
Individuals and businesses lend their accumulated savings to borrowers. In exchange, borrowers give lenders a debt instrument. These debt instruments, typically called bonds, represent a promise by borrowers to pay interest income to lenders on the principal (the amount of money borrowed) until the principal is repaid to the lenders. When a municipal (state or local) government issues bonds, the principal (or proceeds) is typically used to finance the construction of capital facilities, but may also be used for cash management purposes when revenue collections do not match spending needs during the fiscal year.