Such funds have a diversified portfolio of short-term municipal bonds. Their primary objective is to offer stable, tax-exempt income with low risks. Rating: Credit ratings performed by credit rating agencies establish the credit quality of municipal bonds. Bonds with a high credit rating (such as AAA or AA) are perceived as having a low risk of default.
v.) General Obligation (GO) Bonds: These are the most common type of municipal bond. GO bonds involve the full faith and credit of the issuing government entity whether it be a city or a state. Since the issue of the GO bonds is backed by its ability to raise taxes to retire the debt, the debtor can theoretically impose taxes to ensure repayment on the bond. A city might try to float a GO bond issue to finance the building of a new public library. The interest income from GO bonds is generally exempt from federal income tax.