Final answer:
The correct answer is option c. Municipal bonds are excluded from federal taxation, while federal government bonds and corporate bonds are subject to federal taxation.
Step-by-step explanation:
Municipal bonds are excluded from federal taxation.
Municipal bonds are issued by cities, states, and other local government entities to finance public infrastructure projects such as schools, roads, and bridges. Because the interest earned from municipal bonds is used to fund essential public services, the federal government provides a tax exemption on the interest income generated by these bonds.
On the other hand, federal government bonds and corporate bonds are subject to federal taxation. Interest earned from federal government bonds is taxable at the federal level, although it is generally not subject to state and local taxes. Similarly, interest income from corporate bonds is also taxable at the federal level.