category of municipal bond as defined in the tax reform act of 1986 , which is exempt from federal income taxes as long as it provides no more than 10% benefit to private parties and no more than 5% of the proceeds or $5 million are used for loans to private parties; also called public activity, traditional government purpose, and essential purpose bond. Public purpose bonds include purposes such as roads, libraries, and government buildings.

bond issued by or on behalf of a state or local governmental unit that is exempt from state or local taxes under the Tax Reform Act of 1986. Qualifying issuers have taxing authority, power of eminent domain, or policing power within its jurisdiction. Such bonds may include general obligation bond backed by taxing authority, revenue anticipation notes and Tax Anticipation Notes issued to cover cash flow shortfalls. They are exempt from federal taxes, including the alternative minimum tax but are subject to volume limitations on new issues of tax-exempt securities. Contrast with private purpose bond