What distinguishes municipal bonds from corporate bonds?

Municipal bonds are primarily distinguished from corporate bonds by the tax benefits they often provide to investors. Specifically, interest earned on municipal bonds is typically exempt from federal income tax, and, in some cases, state and local taxes as well, depending on the investor's location and the bond issuer. This tax advantage makes municipal bonds attractive to investors, especially those in higher tax brackets, as it can enhance the effective yield of the bonds compared to taxable corporate bonds.

In contrast, corporate bonds do not offer these tax exemptions, resulting in a different appeal to investors. The characteristics of issuer type and the purposes for which these bonds are used also differentiate them, as municipal bonds are issued by governmental entities to fund public projects. However, it is the tax benefits linked to municipal bonds that serve as a standout feature compared to corporate bonds.