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Questions and Answers
Why do many investors prefer municipal bonds?
Why do many investors prefer municipal bonds?
- Municipal bonds have higher yields
- Municipal bonds have lower risk (correct)
- Don’t know/Not sure
- There is a greater supply of municipal bonds
Which of the following is a reason why many municipal bonds pay lower yields than other government bonds?
Which of the following is a reason why many municipal bonds pay lower yields than other government bonds?
- Don’t know/Not sure
- Municipal bonds are not tax-free (correct)
- There is a lower demand for municipal bonds
- Municipal bonds are higher risk
What is a distinguishing characteristic of municipal bonds?
What is a distinguishing characteristic of municipal bonds?
- Don’t know/Not sure
- They are not subject to income tax (correct)
- They are backed by the federal government
- They have higher yields than other government bonds
Which of the following is NOT a reason why many municipal bonds pay lower yields than other government bonds?
Which of the following is NOT a reason why many municipal bonds pay lower yields than other government bonds?
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What is one advantage of investing in municipal bonds?
What is one advantage of investing in municipal bonds?
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Why is there a greater demand for municipal bonds?
Why is there a greater demand for municipal bonds?
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Study Notes
Municipal Bonds
- Many investors prefer municipal bonds because they offer tax-free income, providing a higher after-tax return compared to other bonds with similar yields.
- Municipal bonds typically pay lower yields than other government bonds due to their tax-free status, which makes them more attractive to individual investors.
- A distinguishing characteristic of municipal bonds is that they are exempt from federal income tax and, in some cases, state and local taxes as well.
- The credit quality of the issuer is NOT a reason why many municipal bonds pay lower yields than other government bonds; instead, it's the tax benefits that drive demand and lower yields.
- Investing in municipal bonds offers the advantage of generating tax-free income, making them appealing to individual investors seeking to minimize tax liabilities.
- There is a greater demand for municipal bonds due to their unique tax benefits, which drives up prices and reduces yields.
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