Which bonds are known for being tax-free at the federal level?

Public Housing Authority bonds, often referred to as "PHAs," are issued by local government entities to fund public housing projects. One of their key features is that the interest earned on these bonds is typically exempt from federal income tax. This tax advantage makes them particularly attractive to investors seeking to minimize their tax liability.

While corporate bonds generate interest income that is taxed at the federal level, and zero coupon bonds, which are sold at a discount and pay no interim interest, are also subject to federal taxation upon maturity, PHAs stand out due to their tax-free status. Convertible bonds, which can be converted into equity at the holder's discretion, do not provide any such tax advantages either. Therefore, the distinction of being tax-free at the federal level aligns specifically with Public Housing Authority bonds.