Final answer:
Municipal bonds and educational savings plans are types of investments that generate tax-exempt income.
Step-by-step explanation:
The type of investment that generates tax-exempt income is a municipal bond. Municipal bonds are issued by state and local governments to fund public projects such as schools, highways, and parks. The interest earned from these bonds is usually exempt from federal income taxes, and in some cases, also exempt from state and local taxes.
Another example of an investment that generates tax-exempt income is an educational savings plan. These plans, also known as 529 plans, allow individuals to save money for education expenses, such as college tuition, while enjoying tax advantages.
It's worth mentioning that while the interest earned from U.S. Savings Bonds is subject to federal income tax, it is exempt from state and local income taxes.