Municipal Bonds are generally thought of for their tax-free characteristic, but there is a small segment of the muni market that is made up of taxable municipal bonds! This includes bonds that were issued under The Build America Bonds (BABs) and have 35% of their interest payments guaranteed by the federal government. Interest income earned from taxable munis is subject to Federal income taxes.
The market for taxable munis is smaller and less liquid than the market for tax-frees, which make up the majority of munis. But the yields on high-grade taxable munis tend to be attractive when compared to other high-grade taxable bond investments. For those times when investors can buy-and-hold a bond to maturity and they need taxable income, taxable municipal bonds may be worth considering.