What are the advantages of investing in municipal bonds?

Investing in municipal bonds offers the significant advantage of tax-exempt interest, which can be particularly beneficial for individuals in higher tax brackets. The interest earned on municipal bonds is generally exempt from federal income taxes, and for bonds issued by the state in which the investor resides, it may also be exempt from state and local taxes. This tax advantage can enhance the effective yield of the bond, making it more attractive compared to taxable bonds.

Additionally, municipal bonds typically have low default rates, particularly when issued by well-established municipalities. This means that investors face a lower likelihood of losing their principal investment, enhancing the overall safety of their investment portfolio. The combination of tax benefits and relatively low risk makes municipal bonds a prudent choice for conservative investors looking for a stable income stream while potentially minimizing their tax liabilities.

The other choices do not accurately represent the fundamental characteristics of municipal bonds. For instance, mentioning high default rates contradicts the general perception of municipal bonds as a safer investment.