Tax-exempt bonds

Securities that earn interest on which the investor pays no federal income tax and, depending on the issue, no state or local income tax. The term is usually applied to municipal bonds, which earn interest that is free of federal income taxes as well as state income taxes if state-issued bonds are purchased by a resident of that state. Sometimes, the yields on tax-exempt securities are compared with the "after-tax" yields of taxable securities, to determine which yield is higher.