Which statement is true about municipal bonds?

Municipal bonds are a type of debt security issued by state, municipality, or county and are used to fund public projects. The key characteristic of municipal bonds is that the interest earned on them is generally exempt from federal income taxes, and in many cases, from state and local taxes as well, especially for residents of the state where the bond is issued. This tax-exempt status makes them particularly attractive to investors in higher tax brackets, who can benefit significantly from the tax savings.

The allure of municipal bonds lies in this tax exemption, which tends to lower their yield compared to corporate bonds. Since investors do not have to pay taxes on the interest income, the effective yield is higher than what it might initially seem. This is why the statement regarding the exemption of interest from federal and most local income taxes is accurate.

In contrast, municipal bonds are generally viewed as lower-risk investments compared to corporate bonds, which are subject to higher risk and volatility. This is reflected in the interest rates of municipal bonds, which are usually lower than those of corporate bonds. This lower risk profile and reliability stem from the backing of government entities.

Furthermore, the interest from municipal bonds being subject to federal and local income taxes, having higher interest rates than corporate bonds, or being