Municipal bonds and corporate bonds are both debt instruments, but they differ in purpose, tax treatment, risk, and accessibility. Municipal bonds are issued by state and local governments or their agencies to finance public projects such as schools, roads, hospitals, and water systems. Corporate bonds, on the other hand, are issued by private or public companies to raise capital for business expansion, acquisitions, or operational needs.

One key difference lies in taxation. Most municipal bonds, especially those issued within the United States, offer interest income that is exempt from federal income tax and sometimes from state or local taxes if the investor resides in the issuing state. Corporate bonds, however, are generally taxable, meaning investors must pay federal and often state taxes on the interest they earn. This tax advantage makes municipal bonds especially attractive to investors in higher tax brackets.

Risk is another distinction. Municipal bonds are generally considered safer, especially those backed by the taxing power of a government (general obligation bonds). Corporate bonds carry higher credit risk, since repayment depends on the company’s financial health. However, corporate bonds often provide higher yields to compensate for this added risk.

In summary, municipal bonds serve public purposes with tax benefits and lower risk, while corporate bonds focus on private business funding with higher yields but greater exposure to default.