Treasury bonds and municipal bonds are low-risk types of securities. The federal government issues treasury bonds, while local and state governments issue municipal bonds. When you purchase a treasury or municipal bond, you are lending money to the government for a set period of time. In return, you receive income, typically with some tax benefits.
The Bureau of the Public Debt, a federal department, issues treasury bonds to provide funds to operate the federal government and to cover the federal debt. Meanwhile, municipal bonds are used to fund local and state public projects, such as roads, schools and other infrastructure. All treasury bonds mature at 30 years, which is the time when an investor can redeem a bond in return for the full face value of the bond. Municipal bonds have varying lengths until maturity.
Both treasury bonds and municipal bonds provide their investors with a source of income through regular interest payments. The interest payments for treasury bonds are always made twice a year. Interest payments for municipal bonds also are paid twice a year most of the time, but some bonds may make more frequent or less frequent payments. The interest payments highlight the lender relationship that an investor has with treasury and municipal bonds, and it provides investors with an incentive to invest in these types of securities.
The interest income that you receive from treasury bonds twice a year is subject to federal income taxes. However, it is exempt from any possible local and state income taxes. Municipal bonds have varying tax implications. Most municipal bonds are exempt from federal taxes and from state and local taxes in the states where they are issued. Certain municipal bonds, however, are taxable at the federal level. The tax advantages of both treasury and municipal bonds boost their yields in comparison to other bond types that do not offer the same exemptions.
Both treasury bonds and municipal bonds offer lower interest payments than other sectors of the bond market, such as corporate bonds. This is because of the tax advantages that the securities provide and their backing by their government providers, meaning issuers do not need to offer higher rates to attract investors. Treasury bonds have no risk of default because they are guaranteed by the federal government, meaning you can count on receiving your principal and interest on time. Municipal bonds have a very low risk of default because of the capability of local and state governments to increase taxes to cover their debts, but they are not as risk-free as treasury bonds.