One of the advantages of investing in municipal bonds is that they may be tax exempt. Generally, municipal interest is Federal tax exempt. It can also be state tax exempt. Typically, municipal interest earned from bonds originating in a state are tax exempt to that state. This tax exempt status raises the effective yeard of a bond. For example, a 5.00% Federal tax exempt bond would have the same after tax earnings as a 7.25% taxable bond for someone in the 31% tax bracket.