Municipal Bond.
A definition, in plain English — with the books that teach it.
What it means
Municipal bonds ("munis") are debt securities issued by states, cities, counties, and other government entities to fund public projects like roads, schools, and hospitals. Their defining advantage is federal tax exemption on interest income — and often state and local tax exemption for residents — making them especially attractive to high-income investors in elevated tax brackets. The effective after-tax yield of a muni must be compared to taxable alternatives using the "tax-equivalent yield" calculation to determine whether the lower nominal yield is actually higher after taxes.
Example
An investor in the 37% federal tax bracket considers a muni bond yielding 3.5%. The tax-equivalent yield is 3.5% / (1 − 0.37) = 5.56%. Any taxable bond yielding less than 5.56% would deliver less after-tax income, making the muni the better choice for this investor.