Final answer:
Municipal bonds offer lower rates of interest because they are tax-exempt, providing a tax advantage that leads investors to accept a lower interest rate compared to taxable bonds.
Step-by-step explanation:
The reason municipal bonds offer lower rates of interest income for their investors is that they are tax exempt - at least at the federal level (Option D). Municipal bonds are issued by local and state governments and are generally free from federal taxes, and often from state and local taxes if the investor lives in the state where the bond was issued. This tax advantage means that investors are willing to accept a lower interest rate for municipal bonds when compared to taxable bonds. The interest rate of a bond is generally higher if the bond is taxable because the investor must pay taxes on the interest income earned. Thus, the tax exemption is a significant factor in the lower interest rates associated with municipal bonds.
Municipal bonds offer lower rates of interest income for their investors because they are tax exempt, at least at the federal level (option D). This means that the interest income from these bonds is not subject to federal income tax, which reduces the overall return for investors. Since investors receive lower after-tax returns on municipal bonds compared to other taxable investments, the interest rates offered on these bonds are typically lower.