Question

Bonds issued by the U.S. government:

1) are considered to be free of interest rate risk.
2) generally have higher coupons than those issued by an individual state.
3) are considered to be free of default risk.
4) pay interest that is exempt from federal income taxes.
5) are called "munis".

Answer 1

Bonds issued by the U.S. government have a relatively low risk but do carry some interest rate risk. They generally have lower coupons than those issued by individual states. The interest income from these bonds is subject to federal income taxes.

Step-by-step explanation:

The U.S. government issues Treasury bonds, which are considered to be relatively low risk due to the government's ability to pay off the bond. These bonds typically have a lower interest rate compared to bonds issued by other entities, such as individual states or corporations. While they are generally free of default risk, they do carry some interest rate risk. Additionally, the interest earned from U.S. government bonds is subject to federal income taxes.

Example: If an individual purchases a $1,000 U.S. government bond with a coupon rate of 2%, they will receive $20 in interest income per year. However, they will need to report and pay taxes on this interest earnings.