Taxpayers have fond feelings for municipal bonds, especially at tax time.
Interest is free from federal taxes. If you live in the state issuing the bond, interest is exempt from state and possibly local taxes as well. Due to their tax savings, municipal bonds offer lower yields than taxable bonds of the same credit quality. Yet, for those of you in tax brackets of 28 percent or higher, the tax advantage makes them worthwhile. These are backed by the full faith and credit of the government selling the bond.