Congress encourages investors to lend money to cities, towns and states so these municipalities can pay for public projects such as schools, roads, power generation and distribution systems, and hospitals. This encouragement from Congress exempts municipal bond interest paid to investors from federal income taxes. Municipal bond interest is also exempt from state taxes if the investor owning the bond lives in the state where the bond was issued. May be subject to Alternative Minimum Tax (AMT)

Because of this tax advantage, municipal bonds typically pay a much lower rate of interest than a taxable corporate bond of similar quality. Thus, municipal bonds appeal most to investors in the highest tax brackets, where the tax exemption provides the biggest tax savings.

While the market for municipal bonds is huge, it is still mostly a negotiated market. Municipal bonds may be purchased by calling a broker, who will review your investment criteria with you and then show you available bonds fitting your requirements.

Municipal bonds are issued by various governmental and municipal entities in various maturities - from short-term (maturities between 1 and 5 years), to intermediate-term (maturities between 5 and 15 years), to long-term (maturing in more than 15 years). Most municipal bonds carry a letter-coded rating to indicate their relative credit quality.

Moody's	S & P	Meaning
Aaa	AAA	Best quality, with the smallest amount of risk. Issuers are extremely stable and dependable.
Aa	AA	High quality, with a slightly higher degree of long-term risk.
A	A	High to medium quality, with many strong attributes but with some risk exposure to changing economic conditions.
Baa	BBB	Medium quality, currently adequate but with significant risk possible over the long term.
Ba	BB	Some speculative element, with moderate security but not well safeguarded for the long haul.
B	B	Able to pay now but with a significant risk of default in the future.
Caa	CCC	Poor quality with a clear danger of default.
Ca	CC	High speculative nature, often in or near default.
C	C	Lowest rated, poor prospects of payment going forward but may be current in payments.
--	D	In default.