Doctrine of Mutual Reciprocity is an agreement, which stated that the federal government would not tax interest income received by investors in municipal bonds and that reciprocally the states would not tax interest income received by investors in federal debt obligations
Applying "Doctrine of Mutual Reciprocity" to Securities Exams:
One of the main advantages of investing in municipal bonds is that fact that the interested earned by investors is free from federal income tax. This allows the states and municipalities to sell bonds with significantly lower interest rates than would otherwise be attractive to investors. The Doctrine or Mutual Reciprocity has been repealed but it is highly unlikely that the federal government will tax municipal bond interest.