Which bond type is typically exempt from federal income tax?

Which bond type is typically exempt from federal income tax?

• A. Corporate bond
• B. Municipal bond
• C. U.S. Government bond
• D. Foreign government bond

Answer: (B)

Municipal bonds are typically exempt from federal income tax because their interest helps fund public projects. That tax-exempt status lowers the investor’s after-tax return, which is especially appealing to those in higher tax brackets. Most other bond types do not share this federal tax exemption: corporate bonds pay interest that’s fully taxable at the federal level, U.S. Government (Treasury) bonds are subject to federal income tax (though they may be exempt from state and local taxes), and foreign government bonds are generally taxed as ordinary income in the U.S. So the bond type that is typically exempt from federal income tax is municipal bonds.

Municipal bonds are typically exempt from federal income tax because their interest helps fund public projects. That tax-exempt status lowers the investor’s after-tax return, which is especially appealing to those in higher tax brackets. Most other bond types do not share this federal tax exemption: corporate bonds pay interest that’s fully taxable at the federal level, U.S. Government (Treasury) bonds are subject to federal income tax (though they may be exempt from state and local taxes), and foreign government bonds are generally taxed as ordinary income in the U.S. So the bond type that is typically exempt from federal income tax is municipal bonds.