What are municipal bonds and how are they used? Q.What are municipal bonds and how are they used? A.Municipal bonds (a term that encompasses both state and local government debt) are obligations that entitle owners to periodic interest payments plus repayment of principal at a specified date. States and localities (cities, townships, counties, school districts, and special districts) issue bonds primarily to pay for large, expensive, and long-lived capital projects. Read more about What are municipal bonds and how are they used?