Tax-exempt money market funds invest in a variety of public finance short term debt instruments that are used for the financing the needs of local public authorities or other public service organizations.  In the United States, federal, state and local governments all issue paper to meet funding needs.  States and local governments issue municipal paper.  Tax-exempt money market funds invest in securities issued by state and local government entities that pay interest income that is exempt from federal income taxes.  Otherwise, these money market instruments generally have the same features and operating characteristics as other money market mutual funds.  Tax-exempt money market securities exist because states and municipalities need to borrow money for their short-term needs.

Investments may include general obligation bonds and notes, revenue bonds and notes, commercial paper, private placements, option bonds, private activity bonds, industrial development bonds and municipal lease contracts.  Securities purchased may allow for fixed, variable or floating rates of interest or may even be zero coupon securities.  The money market funds may buy or sell these securities on a when-issued or forward commitment basis.

General obligations bonds are bonds that are issued by municipalities, and are backed by the full credit and taxing power of the issuer not a specific taxed source. 

Revenue bonds are municipal bonds payable only from the revenues generated by the facilities being financed or from the proceeds of a special excise tax on other specific income sources, such as the users of the facility being financed. 

Tax-exempt commercial paper is often issued by non-profit institutions, universities and economic development authorities, as well as state and local municipalities for short term needs.

Federal Agency short-term securities that are short-term securities issued by government sponsored enterprises such as the Farm Credit System, the Federal Home Loan Banks and the Federal National Mortgage Association.

Short-term municipal notes also include tax anticipation notes, bond anticipation notes, revenue anticipation notes and construction loan notes issued by state and local municipalities.  These money market securities are short-term notes issued by municipalities in anticipation of future tax receipts or other future revenues. 

Most money market mutual funds also have the right to purchase some taxable money market instruments, such as U.S. government issues or highly rated commercial paper, when the supply of eligible municipal money market securities is depleted.

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