Which bonds are issued by state and local governments?

Municipal bonds are specifically issued by state and local governments to finance public projects such as infrastructure, schools, and hospitals. These bonds are often used to raise capital for projects that benefit local communities. The key feature of municipal bonds is that the interest income is typically exempt from federal income tax, and in some cases, state and local taxes, making them an attractive investment for individuals in higher tax brackets. This tax advantage incentivizes investors to purchase them, thus providing necessary funding for municipalities.

In contrast, Treasury bonds are issued by the federal government, agency bonds are issued by government-sponsored enterprises, and corporate bonds are issued by private sector companies. Each of these other bond types serves different purposes and issues them under different circumstances, which distinguishes municipal bonds as the correct answer to the question regarding bonds issued by state and local governments.