Final answer:
Gracie should consider investing in municipal bonds or U.S. Treasury securities, such as Treasury Notes, Bonds, and T-Bills, which offer low-risk and tax-exempt interest income, helping to supplement her retirement savings.
Step-by-step explanation:
Gracie, who has retired after serving as a teacher for 40 years, is looking to supplement her retirement savings with a low-risk financial instrument that provides interest income exempt from federal taxes. In this scenario, Gracie should invest in government issues, specifically municipal bonds or U.S. Treasury securities such as indexed bonds, which provide a rate of return above inflation. Municipal bonds are especially beneficial for tax-exempt income, as they are not subjected to federal income taxes and sometimes also offer state and local tax exemptions, depending on where Gracie resides.
Various government bonds, including Treasury Notes, Treasury Bonds, and Treasury Bills (T-Bills), are considered low-risk because they are backed by the full faith and credit of the U.S. government. Another option for Gracie could be investing in U.S. Savings Bonds, which are also federal debt securities that provide a safe way to save money with the added advantage that the interest earned is exempt from state and local income taxes.