Municipal Bonds

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These are bonds issued by municipalities (towns, cities, counties, states). Like any other bond issuers, municipalities issue bonds to raise money, often for specific projects that are to be undertaken. The coupon or interest paid to the bondholder is usually paid twice a year and is generally exempt from federal income tax. However, the interest is typically only exempt from state income tax if the buyer of the municipal bond resides in the state where it was issued. These tax-exemptions can make municipal bonds an attractive investment. Note, however, that income from municipal bonds could be subject to the alternative minimum tax. Also, if the bondholder sells the bond and makes a profit, there could be capital gains tax payable.