Final answer:
Interest earned on a city of Denver bond is generally excluded from gross income for federal tax purposes, offering tax-free interest income to investors. However, state and local tax implications may vary.
Step-by-step explanation:
Interest earned on a city of Denver bond is typically excluded from gross income for federal tax purposes. This is due to the federal tax exemption for municipal bonds provided by the issuer within the United States, under the current tax code. Such bonds are attractive to investors because they offer a way to earn tax-free interest income. While the interest is exempt from federal taxes, it's important to note that there might be state and local tax implications, depending on the investor's state of residence and the laws applicable there.