A bond (specifically a municipal bond) whose holder is exempted from paying taxes on its interest income. This bond is issued by a municipal, county or state government. The bond’s interest coupons are not subject to federal income tax, and sometimes also state or local income tax. For issuers, tax-exempt bond financing provides long-term below market interest rate financing for municipal projects. Some tax-exempt bonds, called private activity bonds, are subject to the so-called alternative minimum tax (AMT).