Tax-exempt municipal bonds are tax-free, long-term, fixed-income investments that are issued by a municipality such as a city, county, state or in some cases a village, explains Edward Jones. There are two types of tax-exempt municipal bonds: revenue and general obligation.
The goal of a tax-exempt municipal bond is to offer regular income by having a fixed rate of return payable every six months while being free from federal income tax and even state and local income tax in some cases, notes Edward Jones.
As of 2015, many tax-free municipal bonds are insured, which ensures a consistent, timely payment of principal and interest. These bonds are typically sold by municipalities to finance large projects that require a large amount of capital over a long period of time, according to InvestingInBonds.com.