Question

What is a “municipal bond”? While the U.S. Treasury has never defaulted, there are many
examples of municipal bond issuers who have defaulted on their payments to bondholders.
Despite that, municipal bonds often offer lower yields to maturity than comparable Treasury
bonds. Why is that?

Answer 1

When different local agencies including the municipal corporation in towns and cities issue bonds these bonds are called Municipal bonds. Capital gains on municipal bonds are considered normal taxable income and the interest that is earned on these bonds is exempted from Federal income taxes. This is the reason why municipality is able to borrow money easily at lower interest rates. This is perhaps also the reason why they offer a lower yield to maturity. Comparing to a US Treasury Bond Municipal bonds don't have to attract investors to purchase the bonds because tax exemption increases their demand.