Municipal bonds may also be classified according to the purpose of their issue, precisely as business corporation bonds are, which it has been seen are grouped into improvement bonds, refunding bonds, and other classes connoting the object of their issuance. Municipalities as a rule issue bonds for definite purposes which are generally authorized by statute and stated on the face of the bond. According to this classification bonds are divided into two principal groups: those issued for revenue-producing improvements, and those put out for non-revenue-producing, or unproductive, improvements. An example of municipal bonds issued for productive purposes are the New York City Rapid Transit issues which were put out for the purpose of building subways and other rapid transit facilities. Other examples are the bonds of a number of port cities put out for the purpose of purchasing and improving docks, harbors, and transportation facilities, from which regular rentals are obtained. Direct income, however, is not necessarily to be regarded as the sole criterion of productive improvements, since improvements are productive if they cause an increase in the value of municipal property. The most common examples of profitable municipal utilities for which bonds are issued are public water-works. The revenue from the water rentals is expected to cover the interest and amortization charges on the bonds. Street and paving bonds may likewise be considered as issued for productive purposes, though roads do not as a rule bring the municipality revenue directly.

Not infrequently it happens that enterprises which are undertaken for productive ends fail of their purpose completely, neither yielding a profit nor otherwise benefitting the people. Take, for example, the Erie Barge Canal in New York State, on which over $150,000,000 has been spent. It is completed and ready for use but little more than a few scows ply on it. It has thus far been simply a heavy financial burden to the state.

In the unproductive class are generally included school, hospital, park, and sewerage bonds, as their proceeds are expended for purposes which, though essential or beneficial to the municipality, do not add, except very remotely, to its revenue-producing power. Indebtedness incurred for such purposes, however, is essentially economic. On the other hand, some cities are said to have incurred debt to furnish music and other transitory recreations for the people. Bonds issued for such purposes are not generally desirable investments.