Tax-exempt bond

A tax-exempt bond is a security issued by a government entity, whose interest payments to investors are not subject to federal income taxes and may also be exempt from taxation at lower levels of government. This tax exemption makes such bonds an especially attractive investment for individuals with a high incremental tax rate. Tax-exempt bonds are usually issued by city, county, or state governments to finance their expenditures, such as to build highways, schools, and water distribution systems.