Contrast the income tax consequences of the yields on the following investments:

U.S. Treasury bonds.

Bonds issued by the State of Illinois.

Bonds issued by a publicly held corporation at their face value.

Bonds issued by a publicly held corporation at a discounted value.

Preferred stock issued by a publicly held corporation.

Shares issued by a mutual fund.

Interest on U.S. Treasury bonds is taxable income for federal purposes but tax-exempt for states purposes.

Interest on a State bond is tax-exempt for federal purposes but may be taxable income tax-exempt for state purposes, depending on the taxpayer s state of residence.

The stated interest paid on a corporate bond is taxable income for both federal and state.

The stated interest paid on a corporate bond and the amortization of the original issue discount (OID) is taxable income for both federal and state purposes.

Dividends on preferred stock are taxable income for both federal and state purposes qualified dividend income is taxed at a preferential federal rate.

Ordinary dividends paid by mutual funds can consist of ordinary taxable income, qualified dividend income, and capital gain distributions. Qualifies dividend income and capital gain distributions are taxed at a preferential federal rate.