A debt security issued by a state or local government or governmental entity, typically for building roads, schools, etc. The interest is usually exempt from federal income taxes, which has made municipal bonds favorites of people in high tax brackets. In fact, bonds issued by the state in which you live are exempt from state taxes as well. Municipal bonds are rated by Moody's and Standard & Poor's, and sometimes their interest and principal is insured by a private concern such as AMBAC. For maximum safety, a municipal bond portfolio should be geographically diversified, should contain only highly rated issues, and should have a duration of no longer than, say, seven to 15 years.