A regular bond's interest is taxed as ordinary income. A municipal bond's interest is free of federal tax, and often state tax too, so the after-tax yield can come out ahead.
See how it works through one simple example.
Interest from a normal bond is taxed at your ordinary rate, so a high bracket takes a big bite.
Municipal bond interest is exempt from federal tax, and often your state's tax if it is in-state.
Compare what is left after tax, and in a high bracket the muni often beats the taxable bond outright.
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The honest version.
Interest is generally free of federal tax, and in-state munis are often free of state tax too.
Investors in higher tax brackets, where the tax-free yield beats a taxable bond after tax.
Pre-tax yields are lower, and some muni income can touch other tax rules.
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