by 
The Curious Bag
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Tax free municipal bonds offer investors a fairly safe investment with the added benefit of the interest income not being subject to federal income taxes.
History
The federal government does not tax municipal bonds in order to not interfere with the ability of state and local governments to borrow money.
Significance
Bond interest is usually taxed at your normal income tax rate. As of 2010, this can be as high as 35 percent.
Features
While you may be exempt from paying federal income taxes on the interest, you may have to pay state or local income tax if you are not a resident of the state the bonds were issued.
Safety
Municipal bonds have a low rate of default which means that your investment is safer than other options such as junk bonds or risky stocks.
Warning
Even though municipal bonds may not be taxed, the interest can be included in your modified adjusted gross income which may disqualify you from taking certain tax deductions.
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