This type of bond is used by municipalities to finance public works facilities and improvements. However, the vast majority of the benefit provided by the project being financed by a public purpose bond must be directed at the public at large, and not at private individuals. Public Purpose Bonds are generally employed to fund such projects as road construction and maintenance, libraries, swimming pools and other municipal facilities.

As with all other types of municipal bonds, the interest paid from Public Purpose Bonds is exempt from federal income taxes (and often state and local taxes as well). Public Purpose Bonds were first defined in the Tax Reform Act of 1986. Municipalities that are authorized to issue this type of bond must have the ability to tax their residents, plus eminent domain or police power.