municipal bond

State or local governments offer muni bonds or municipals, as they are called, to pay for special projects such as highways or sewers. The interest that investors receive is exempt from some income taxes.

A bond issued by state or local government. Interest from these bonds is generally tax-free to residents but in some cases, interest is federally taxable if subject to Alternative Minimum Tax. Note that any capital gain realized by trading a municipal bond is subject to capital gains tax. Because of this hybrid tax situation, municipal bonds are normally put in taxable brokerage accounts since there is no special account for them. See Bonds.