A debt security issued by a state, city, or local government to fund public projects like schools, roads, or hospitals. Municipal bonds often have a tax advantage: the interest you earn is typically free from federal income taxes. They are considered relatively safe because they are backed by the local government's ability to collect taxes.
Your city issues a municipal bond paying 3% interest per year. Because it is a municipal bond, you do not owe federal income tax on that 3% interest. If you are in a high tax bracket, this tax savings can make the bond more valuable than a regular bond paying a higher interest rate.
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