Your neighbor asks you about Municipal Bonds, you would be correct in telling him all of the following ...

By Investopedia Staff AAA
Q:
Your neighbor asks you about Municipal Bonds, you would be correct in telling him all of the following EXCEPT:
a) Capital gains from the sale of municipal bonds are exempt from federal income taxes
b) Municipal bond income is sometimes exempt from state tax
c) Income from a revenue bond is payable from the earnings of the income-producing facility
d) General Obligation bonds are backed by the full faith and credit of the issuer
A:
The correct answer is a):
The two types of Municipal Bonds (Muni-Bonds) are general-obligation (GO) bonds and revenue bonds. GO bonds are backed by the full faith and credit of the issuing authority and usually include city, county, and school district bonds- their income payments are made from the taxes collected. Revenue Bonds are issued to finance income-producing facilities such as airports, colleges, electric and gas systems- their income is paid from the revenues of the project. The income generated from a muni-bond is exempt from federal taxes, and sometimes exempt from state taxes if issued in the state of residence of the taxpayer. Capital gains are taxed at the ordinary capital gains rate.

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