Why do investors typically buy municipal bonds?

Investors typically buy municipal bonds primarily because the interest earned is exempt from federal income tax. This tax-exempt status makes municipal bonds particularly attractive to investors in higher tax brackets, as it allows them to keep more of the interest income compared to taxable investments. Furthermore, this can enhance the effective return on these bonds when considering the investor’s tax situation, making them a preferred choice for tax-conscious individuals.

The other options do not accurately reflect the primary reasons for investing in municipal bonds. While investors may be drawn to safe investments, municipal bonds are not inherently guaranteed by the government in the same way that, for example, U.S. Treasury securities are. Additionally, municipal bonds generally do not offer higher yields than corporate bonds; in fact, they often have lower yields due to their tax-exempt status. Lastly, while some investors may appreciate certain securities for their potential returns, the notion that municipal bonds offer guaranteed returns is misleading, as all investments carry some level of risk, including the potential for default.