A tax credit bond is a type of municipal bond where bondholders receive credits against their federal income tax returns in lieu of or in addition to interest payments.
Some Build America Bonds (BABs), for example, were tax credit bonds. In addition to interest payments from state or local government issuers, investors received a federal income tax credit equal to 35 percent of the interest. The tax credit allowed state and local governments to offer lower interest rates and still market the bonds as an attractive investment.