What type of bond typically offers lower interest rates due to tax advantages?

Municipal bonds are typically issued by state and local governments and offer certain tax advantages that make them attractive to investors. The interest earned on these bonds is usually exempt from federal income tax, and in some cases, it may also be exempt from state and local taxes if the investor resides in the state where the bond is issued. This tax-exempt status allows municipal bonds to offer lower interest rates compared to other types of bonds, such as corporate bonds, which do not have these tax benefits.

Investors are often willing to accept lower yields on municipal bonds because the after-tax return can be more favorable than that of taxable bonds, especially for those in higher tax brackets. This makes municipal bonds a popular choice among investors looking for tax-efficient investment options. Consequently, the combination of lower interest rates and tax benefits makes municipal bonds a distinct choice in the bond market.