Question

Why can municipal bonds offer a lower coupon rate than a similarly priced corporate bond with the same risk factors?

Answer 1

Municipal Bonds- Are the debt instruments, issued by local or state Government to raise the money for public expenditure and infrastructure projects.

Why municipal bonds are preferred:

1. Municipal bonds provide lower coupon rate because they are Government bonds and the risk is very less. They provide fixed coupon. Government securities provide lower coupons than corporate bonds.
2. Municipal bonds are highly liquid and traded on secondary market.
3. These bonds provide higher tax advantage, they may be free from federal tax, state and local tax in some conditions.

Corporate bonds- Are the debt instruments, issued by corporate to raise the funds for business operations of finance the projects.

1. They provide little higher coupon than municipal bonds as they are riskier than municipal bonds, because of the risk factor, they provide higher coupon. They have higher default and credit rating risk.