Final answer:
Municipal bonds are generally issued by local governmental bodies and are popular with tax-exempt investors due to favorable tax treatment. However, they are not risk-free, may or may not be zero-coupon bonds, and are often callable before maturity.
Step-by-step explanation:
Municipal bonds are financial instruments issued by cities, states, and other local governmental bodies to fund public projects. They are not issued by the federal government; Treasury bonds serve that purpose. While municipal bonds are often purchased by tax-exempt investors because the interest income is typically exempt from federal income tax (and sometimes state and local taxes), they are not entirely risk-free. Unlike Treasury securities, which are considered to be of the lowest risk since they are backed by the full faith and credit of the U.S. government, municipal bonds carry some risk of default, although it is generally low.
Furthermore, not all municipal bonds are zero-coupon bonds; some do pay periodic interest. Zero-coupon bonds are a specific type of bond that do not pay interest until maturity. Also, many municipal bonds are indeed generally callable, meaning the issuer can redeem the bond before its maturity date, usually after a specified call date.
Understanding these characteristics is crucial for anyone involved in investing or finance, as it affects decisions about portfolio diversification, income strategy, and risk management.