A municipal bond is a bond that is issued by a government entity smaller than the state, so could be a city or smaller local government like those designated as a village. Others issuing municipal bonds could be school districts, counties, or a number of other government agencies. The key is they are below the level of a state government in definition and use.
The most powerful and attractive purpose for investing in a municipal bond is that they are in most instances exampt from Federal, State, and local taxes, although that needs to be confirmed, as there are exceptions to the rule, primarily based on what the money will be used for. Usually exemption from state taxes is based upon a resident in the state the municipal bond is issued.
With the subprime mortgage crisis, municipal bonds came under pressure and as a result dropped in value, as credit ratings plummeted in a number of circumstances.