Corporate and municipal bonds play a key role in fixed income portfolios. Understanding their different risk/return profiles and tax treatment can help you decide how each can help you reach your investment goals.
If you are building a diverse bond core, corporate and municipal bonds are likely to surface in your research. So here’s the gist—the key difference between them is who issues the bond: corporations issue corporate bonds, while government entities issue municipal bonds. Buying a corporate bond is like lending money to a business to grow; buying a municipal bond is like funding your city to build roads or schools. In both cases, you’re promised repayment with interest over time.
Investors may choose to hold both types of bonds, or one or the other, depending on their investment goals. Dive deeper to see where each type might fit into your portfolio.
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Corporate bonds
Corporate bonds
Issued by companies to help fuel business expansion, refinance debt, and other capital-raising purposes.
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Municipal bonds
Municipal bonds
Issued by states, municipalities, local governments, and cities, largely to fund infrastructure projects.
Corporate bonds, or “corporates,” are bonds issued by companies and corporations. Unlike when buying shares of a company’s stock and owning equity, corporate bondholders earn interest on the bond and receive their principal at maturity, or the date the issuer is expected to repay the debt to bondholders.
Companies issue corporate bonds to:
There are two main types of corporate bonds.
Investment-grade
Investment-grade corporate bonds are issued by companies with strong credit ratings (BBB-/Baa3 or higher). These issuers are considered more likely to meet their debt obligations on time. As a result, investment-grade bonds tend to offer lower yields, but have lower risk and more liquidity.
Key characteristics of investment-grade corporates:
Investors may look to investment-grade corporate bonds if they are seeking stable income and capital preservation.
Non-investment-grade
Non-investment-grade bonds are issued by companies with lower credit ratings (below BBB-/Baa3), reflecting higher default risk. To compensate, these bonds offer higher yields and are often used to enhance portfolio returns.
Key characteristics of non-investment-grade corporates:
Investment-grade corporates generally have lower yields and coupons than lower-rated bonds because they carry less credit risk. They also tend to have moderate durations, making them somewhat sensitive to interest rate changes.
Lower-rated corporates tend to offer higher yields and coupons to compensate for greater credit risk. As a result, their returns rely more on income and credit spread changes rather than interest rate movements. Due to their higher credit risk, investors generally demand shorter maturities to limit credit exposure—and because higher coupons pull cash flows forward—non-investment-grade corporates tend to have lower duration than investment-grade. As a result, they tend to be less sensitive to rate fluctuations.
Unlike Treasury bonds that are issued at the federal level by the US Treasury, municipal bonds, or “munis,” are issued by government entities, including:
Muni bonds are like Treasury bonds, where bondholders become creditors to the government. If you invest in, or buy, a municipal bond, you are essentially loaning money to the government issuer.
Government entities issue municipal bonds to pay for public infrastructure projects—like building roads, highways, or schools. Municipal bond investors will earn their principal investment back plus interest if they hold the bond through maturity and the issuer does not default, similar to other fixed income products.
Less commonly, munis can be issued on behalf of private entities such as non-profit colleges or hospitals.1
There are two common types of municipal bonds.
General obligation bonds are issued by states, cities, and counties but are not secured by any collateral. General obligation bonds are backed by the issuers’ ability to tax residents to pay bondholders.
Revenue bonds are not backed by taxing power. Instead, this type of municipal bond pays back investors through the revenue the issuer generates from the money raised by selling bonds. An example of this would be using toll revenue that a new highway generates to pay back bondholders.
In the municipal bond market, yields and coupons generally rise as credit quality falls, while duration stays fairly steady. This is mainly because munis are driven by tax-sensitive retail and mutual funds that seek long-term, tax-exempt income. There is persistent demand for 15- to 30-year municipals regardless of rating.
Corporate bonds, on the other hand, show bigger swings in duration and more dramatic changes in yield and coupon, reflecting differences in issuer behavior and market liquidity. These contrasts show how credit risk is priced differently and why investors use distinct strategies for munis vs corporates.
Tax-equivalent yield (TEY) is important for investors comparing municipal bonds to corporate bonds.
Since municipal bonds are tax exempt, investors often use TEY to compare the return on a tax-exempt bond with a taxable bond (like a corporate bond). Since interest from municipal bonds is often exempt from federal (and sometimes state) income taxes, TEY calculates what a taxable bond would need to yield to match the after-tax return of the tax-free bond.
For example, assuming a tax rate of 40.8%, a muni with a YTW of 3.72% would have a tax-equivalent yield of 6.28%. This means a taxable bond would need to yield 6.28% to provide the same net income after taxes.
Municipal TEYs are generally meaningfully higher than equally rated taxable corporates (Figure 4). This is mainly due to the muni market’s narrow, retail investor base and its high fragmentation—meaning there is a very high number of issuers. Those two factors lead to munis being thinly traded.
Figure 3: Municipal bond issues outnumber corporate issues by more than 5 to 1
Number of municipal bond issues in the Bloomberg Municipal Bond Index and Bloomberg High Yield Municipal Bond Index
Number of corporate bond issues in the Bloomberg US Corporate Bond Index and Bloomberg US High Yield Bond Index
Source: Bloomberg US Corporate Bond Index, Bloomberg US High Yield Bond Index, Bloomberg Municipal Bond Index, Bloomberg High Yield Municipal Bond Index, as of October 14, 2025.
This creates conditions that lead to structural inefficiencies and lower liquidity in the muni market, resulting in a liquidity premium for munis over corporates.
Like other fixed income investments, both corporate and municipal bonds can pay investors in a number of ways, including:
Fixed rate bonds pay, as the name suggests, a fixed rate of interest. With fixed rate corporates, investors earn the same amount of interest, also known as a coupon payment, regardless of movements in interest rates.
Interest rates of floating rate, or variable rate, bonds reset periodically. These bonds are subject to movements in interest rates. This means when interest rates move up or down, the interest an investor earns also changes. Investors may earn interest rates similar to a comparable Treasury bond, plus a little more.2
Zero-coupon bonds make no interest payments until the bond matures. Instead, investors who hold these bonds to maturity, assuming the issuer can pay back its bondholders, will receive their principal and interest at the maturity date. For example, if an investor buys a zero-coupon bond for $1,000 with a face value of $1,200, they will receive $1,200 at the date of maturity.
Although municipal bonds tend to have lower yields than corporate bonds, corporate bonds are subject to greater credit risk. A municipality can raise taxes to pay back its bondholders, but corporations cannot. If a company that issued corporate bonds goes bankrupt or cannot pay back bondholders, bondholders may have a claim on assets and cash flows of the company depending on the type of bond.
Figure 5: Compare municipal and corporate bond characteristics
| Characteristic | Corporate bonds | Municipal bonds |
|---|---|---|
| Issuers | Companies and corporations | Cities, counties, states, and municipalities. Municipal borrowers sometimes issue bonds on behalf of private entities such as non-profit colleges or hospitals. These are known as conduit borrowers |
| Taxes on earned interest | Interest income is usually taxable at an investor’s ordinary state and federal income tax rate | Interest income is generally exempt from federal taxes and can be exempt from local and state taxes |
| Risks | Usually riskier than municipal bonds, as companies can go bankrupt. Investors may have a claim to company’s cash flow or assets if the bond is a secured bond, but may not if the bond is unsecured. Companies usually pledge collateral with secured bonds, such as equipment, property, or inventory | Usually less risky than corporate bonds, since municipal bonds are backed by issuer’s ability to raise taxes to pay back bondholders |
| Liquidity | Typically traded more often than municipal bonds, larger market | Less liquid due to smaller issuance, more fragmentation, held more long term |
| Yields | Generally offer higher yields than municipal bonds | Generally offers lower yields than corporate bonds |
In recent years, the corporate bond market has outpaced the municipal market in size due to:
The bonds’ investor bases—which differ significantly due to the bonds’ distinct risk profiles and tax treatments—have influenced market size.
Municipal bonds are primarily held by individual investors and mutual funds seeking tax-exempt income, while corporate bonds tend to attract a broader mix of investors prioritizing yield and credit exposure over tax advantages. This divergence influences liquidity, pricing dynamics, and the type of risks each market tends to absorb.
In contrast, municipal issuance remains limited by tax-exempt structuring, reliance on domestic investors, and political or legal restrictions on debt levels. Corporations were particularly motivated to issue debt in the post–Global Financial Crisis era, taking advantage of ultra-low interest rates to lock in long-term, inexpensive funding.
Both corporates and municipals can offer investors income and diversification, but whether you invest in one or the other depends on your priorities.
Corporate bonds are best suited for investors seeking higher income who are willing to take on more credit risk and are not concerned about the taxable income that comes with corporate bonds. Municipal bonds, on the other hand, may be better suited for investors seeking tax efficiency and stability. They typically offer lower yields but provide more tax advantages than corporate bonds.
Corporate bonds tend to offer higher yields than Treasury or municipal bonds, making them an attractive option for investors looking to earn income. Corporate bonds also provide regular income for investors who want to invest with a company, but don’t necessarily want to purchase stock. They also tend to be much more liquid than municipal bonds which are typically held long term.
Despite higher yields, corporate bonds carry a higher risk of default, or credit risk, than munis. Additionally, corporate bonds like other bonds are subject to interest rate risks. Companies may not be able to pay back bondholders if they go bankrupt, or if they are unable to generate enough cash to pay back bondholders. High yield bonds, also known as junk bonds, carry a high risk of default but also have higher yields.
Municipal bonds are generally more tax efficient than corporate bonds since their interest usually isn’t subject to federal taxes and is sometimes exempt from state and local taxes. While yields tend to be lower, default risk is also usually much lower than for corporate bonds.
While defaults are less common for municipal bonds, issuers of municipal bonds can still default. Municipal bonds are also less liquid than corporates and many other types of bonds, which can make it more difficult for an investor to buy and sell them. They also usually don’t offer as attractive yields compared to corporate bonds. Like other bonds, municipal bonds are also subject to interest rate risk.
A bond ladder is a strategy where an investor purchases various bonds with different maturity dates. This can help investors mitigate interest rate risk. Is a bond ladder right for you?
