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Municipal bonds can make an attractive investment option for conservative, income-oriented investors because the interest income is often exempt from federal, and potentially state, income taxes. Historically, municipalities exhibit repayment patterns that are stronger than those exhibited by corporate borrowers in the same credit rating bracket, meaning they tend to pay interest and principal on time, as scheduled.

States, cities, counties, and other local governments, as well as enterprises that serve a public purpose, such as universities, hospitals, and utilities, issue municipal bonds. They usually pay interest that is exempt from federal income taxes. Interest may also be exempt from state income taxes if an issuer in your home state issues the bond.

There are two major categories of municipal bonds: general obligation (GO) bonds and revenue bonds.

Corporate bonds typically have higher yields than those of similar fixed income investments, such as Treasuries. They can also provide a steady, predictable income, have a range of diversification choices, and are relatively easy to buy and sell in the secondary market.
 

Companies issue corporate bonds to raise capital for activities such as expanding operations, purchasing new equipment, or building new facilities. The issuing company is responsible for making interest payments and repaying the principal at maturity. Corporate bonds are senior to stock, so interest and principal must be paid before dividends are paid to stockholders.

Treasuries are considered one of the safest investments for protecting capital while also creating a predictable income stream. Additionally, Treasuries offer a wide range of maturity dates to choose from and are relatively easy to buy and sell, and interest payments are generally exempt from state and local income taxes.