NASAA Series 65, Uniform Investment Adviser Law ExaminationInvestment Vehicle CharacteristicsMedium
A client is interested in an investment that offers tax-free income at the federal level and, potentially, at the state and local levels if the issuer is within their state of residence. They prioritize safety and consistent income over capital appreciation. Which of the following would be the most suitable recommendation?
- APreferred Stock
- BCorporate Bond
- CTreasury Bond
- DMunicipal Bond
Show answer & explanationAnswer & explanation
Correct answer: D. Municipal Bond
Municipal bonds offer tax-free interest income at the federal level, and potentially at state and local levels if the investor resides in the issuing state, aligning with the client's desire for tax-free, safe, and consistent income.
Why the other options are wrong
- A. Preferred stock offers dividends that are generally taxable and does not offer the same safety or tax benefits as municipal bonds.
- B. Corporate bonds are generally fully taxable at all levels.
- C. Treasury bonds are tax-free at the state and local levels, but taxable at the federal level.
Municipal Bond
A debt security issued by a state or local government or their agencies to finance public projects, with interest typically exempt from federal income tax.
- Interest is federally tax-exempt.
- May be state and local tax-exempt for in-state residents (triple tax-free).
- Generally considered low risk (especially general obligation bonds).
- Provides consistent income.
Memory trick: Munis for money, tax-free at multiple levels!