Continuing with more investigation into the exciting world of bonds, this time with municipal bonds, also known by their cute nickname, munis.

Municipal bonds are bonds issued by cities, counties, states, etc. for schools, roads, basic infrastructure or other uses. If it makes you feel good, know that buying a muni could be helping to maintain/grow your town or state.

Like bonds from the national government, municipal bonds generally guarantee a fixed rate of return, and it's a pretty safe bet that nothing's going to go wrong--it's the rare city/county/state that defaults (although it's not unheard of).

A good feature that can make a big difference in returns is that munis from within your own state are usually tax-free at all levels, although that's not true with every bond or every locality, so check on that where you are. (An example of a muni that might be taxable is one issued to help construct a sports stadium--because there's no public good from the Fed's point of view. Also, munis from other states won't usually get a tax break from your state's government.)

Municipal bonds are issued in $5,000 increments, so buying one is a sizable investment. If you don't like the idea of buying a single muni for that much, you can buy bond funds, which are just like mutual funds but with a diversified mix of bonds making up the fund. The tax implications of buying a muni fund are different, however, because you will probably buy out-of-state munis as part of the fund, which often makes your gains subject to state and local taxes.

Note that I am not a tax advisor (or any other advisor for that matter) and all the info provided here is simply the best of my knowledge, which should only be a jumping-off point for you to learn more from someone with actual credentials.