The price of a municipal bond can make the bond less attractive even when the interest rate is high. Municipal bonds can be bought at par, at premium or at a discount price. If an investor is paying more for the bond, buying it at premium, the investor should be compensated with high enough interest rates so that in the end the investor comes out ahead. For example, a $100 investment that pays you $1 for 10 days and also $100 at the end is better than a $30 investment that pays you $1 for 10 days and only $10 in at the end. For an investor to invest $30, the bond needs to pay more than $1 a day or pay for longer than 10 days. This shows that considering municipal bond rates alone is not adequate.
Also, the longer the time to maturity, the higher the municipal bond rates should be. For example, consider the following investments. For a $10 investment you will get your money back plus $1 a day for the 5 years or for the same investment you will get $1 a day for the next 10 days. In the latter case, you know you will get your money back soon plus $10 more whereas in 5 years time things could have changed tremendously. There may be other better investments such as $2 a day interest which you cannot participate in because you already lock in your money.
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