Federally Exempt

Rule 17 of 32 in this unit2.1.2

2.1.2 Debt Instruments

SIE outline 2.1.2

Interest on a state or local obligation. Issued at any time after 1953. Not taxable for federal income tax. NOT exempt from every tax.

The trick

Common trap: Municipal interest is exempt from all three taxes. Correct: State and local exemption usually needs an in-state bond. Ask where the buyer lives.

The method for this kind of question

Municipal rules return in Section 4

Now answer

1 question on this screen, from this outline item's own pool, so some will test a rule you met earlier in the unit. Pick an answer, say how sure you are, then reveal. Being sure and wrong is the most useful thing that can happen here, and the coach treats it that way.

Question 1Exam level

A bond is callable at the issuer's option. Market rates fall well below the bond's coupon. What is the investor's likely experience, and who controls the timing?

A. The bond is likely called, and the issuer controls the timing, not the investor B. The bond is likely called, and the investor controls the timing C. The bond will not be called under any circumstance while rates are falling D. The investor may exercise a put to force early repayment instead

How sure are you?

Sure Fairly sure Guessing

Correct: A. The issuer holds the call and exercises it when rates have fallen; the investor has no say in the timing.

B. The call is the issuer's own right; the investor never controls when a callable bond is called.

C. Falling rates are exactly the condition that makes a call likely, not one that prevents it.

D. A put belongs to a different bond feature entirely, and this stem describes a call, not a put.

Unit: SIE outline 2.1.2

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