NASAA Series 65, Uniform Investment Adviser Law ExaminationInvestment Vehicle CharacteristicsMedium
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 comfortable with moderate credit risk. Which of the following debt securities would be most appropriate?
- AAsset-Backed Security (ABS)
- BU.S. Treasury Bond
- CCorporate Bond (Investment Grade)
- DGeneral Obligation (GO) Municipal Bond
Show answer & explanationAnswer & explanation
Correct answer: D. General Obligation (GO) Municipal Bond
General Obligation (GO) Municipal Bonds offer federal tax-exempt income, and often state and local tax exemption for residents, which aligns with the client's tax-exempt income goal and comfort with moderate credit risk.
Why the other options are wrong
- A. Asset-Backed Securities (ABS) are taxable at all levels and their income is not tax-exempt, not meeting the client's primary objective.
- B. U.S. Treasury Bonds are exempt from state and local taxes but are subject to federal income tax, not meeting the federal tax exemption requirement.
- C. Corporate Bonds are typically subject to federal, state, and local income taxes, making them unsuitable for tax-exempt income.
General Obligation (GO) Municipal Bond
A type of municipal bond backed by the full faith and credit and taxing power of the issuing municipality, with income typically exempt from federal (and sometimes state/local) taxes.
- Backed by the full faith and credit/taxing power of the issuer
- Interest income is federally tax-exempt
- Often triple-tax exempt for residents of the issuing state/municipality
Memory trick: GO Bonds: Government Obligation, Great for Tax-Off Income.