NASAA Series 65, Uniform Investment Adviser Law ExaminationInvestment Vehicle CharacteristicsEasy
A client, a high-income earner, is seeking an investment that provides income that is exempt from federal income tax and potentially state and local taxes if they reside in the issuing state. They are also looking for a relatively safe investment. Which of the following debt securities would be most appropriate?
- AMunicipal bonds.
- BU.S. Treasury bonds.
- CCorporate bonds.
- DMortgage-backed securities.
Show answer & explanationAnswer & explanation
Correct answer: A. Municipal bonds.
Municipal bonds offer income that is exempt from federal income tax, and often state and local taxes for in-state residents, making them ideal for high-income earners seeking tax-exempt income.
Why the other options are wrong
- B. U.S. Treasury bonds are federal tax-exempt, but subject to state and local taxes.
- C. Corporate bonds are generally fully taxable at federal, state, and local levels.
- D. Mortgage-backed securities are generally fully taxable and do not offer the specific tax advantages sought.
Municipal Bonds
Debt securities issued by state and local governments or their agencies to finance public projects, known for offering interest income that is exempt from federal income tax, and sometimes state and local taxes.
- Federally tax-exempt interest.
- Often triple tax-exempt for in-state residents.
- Generally considered relatively safe investments.
Memory trick: Muni bonds are 'Money' that's 'No-Tax' for the 'City'.