Municipal Bonds
Which type of investment income is exempt from federal income taxation?
Municipal bonds = federal tax-free interest. Treasuries = state tax-free only.
Complete Analysis & Legal Rationale
Interest from municipal bonds (both general obligation and revenue bonds) is exempt from federal income tax. Treasury interest is exempt from state/local tax but federally taxable. Corporate bonds and preferred dividends are fully taxable.
Distractor Autopsy (Why Other Options Are Traps)
FINRA exam writers design incorrect distractors using specific calculation mistakes and regulatory misconceptions. Review why each option succeeds or fails:
Treasury interest is federally taxable (but exempt from state/local tax).
Corporate bond interest is fully taxable at all levels.
Preferred dividends are taxable (though possibly at qualified dividend rates).
Matches the verified teaching point in the explanation.
Official Standard: Outline-level citation: item maps to Series 7 topic coverage. Prefer a specific FINRA/SEC/MSRB rule citation in a later author pass.