Is the interest received from government obligations$$ taxable? Explain.

Interest on U$.$S$.$ government obligations$($issued after February$29,1942)$ and foreign government obligations

$$

are

are not

taxable.

$$

A limited exclusion is available for Series EE savings bonds if the bond proceeds are used for educational purposes

Interest from Series EE savings bonds is the only government interest that is taxable

There is no exclusion for Series EE savings bonds

$.$ Interest on obligations of$$ states, territories, U$.$S$.$ possessions and their political subdivisions is

$$

tax exempt

taxable

$.$ There

$$

are

are no

exceptions for federally insured$$ loans, arbitrage, and private activity bonds.

Part $2$

b$.$ What impact does the fact that some bond interest is tax exempt have on interest$$ rates?

In$$ general, tax exempt bonds pay a

$$

higher

lower

interest rate than taxable bonds because

$$

investors are willing to accept a lower return on tax exempt investments

investors demand a higher return on tax exempt investments

the tax law requires that tax exempt bonds pay a higher interest rate

the tax law requires that tax exempt bonds pay a lower interest rate

$.$

Part $3$

c$.$ Is an investor always better off buying$$ tax$-$exempt bonds? Explain.

A$.$

No$.$ In$$ general, investors in higher tax brackets are better off investing in taxable bonds because their after tax return is generally lower.

B$.$

No$.$ In$$ general, investors are never better off investing in tax exempt bonds.

C$.$

Yes. In$$ general, investors are always better off investing in tax exempt bonds.

D$.$

No$.$ In$$ general, investors in lower tax brackets are better off investing in taxable bonds because their after tax return is generally higher.