Why are municipal bonds considered advantageous for investors?

Municipal bonds are considered advantageous for investors primarily because they are exempt from federal taxes. This tax exemption can significantly enhance an investor's effective yield, especially for those in higher tax brackets. The interest income earned from municipal bonds is not subject to federal income tax, making them a particularly attractive investment alternative for individuals looking to minimize their tax liabilities while earning a stable income.

Additionally, some municipal bonds may also be exempt from state and local taxes, depending on where the investor resides, further increasing their appeal. This characteristic allows investors to retain more of their income compared to taxable investments, which can be a compelling reason for individuals seeking tax efficiency in their investment portfolios.

The other options highlight features that do not accurately represent the benefits associated with municipal bonds. The notion that they are always high-risk investments does not hold true, as many municipal bonds are considered relatively low-risk, especially those issued by stable municipalities. The idea that they guarantee a high rate of return is misleading; while they can offer competitive returns, they do not guarantee any rate of return, as the interest rates can vary. Finally, stating that they require a large minimum investment is incorrect since there are municipal bonds available for varying investment amounts, allowing access to a wider range of investors.