Final answer:
Interest from bonds issued by U.S. territories, possessions, and the Commonwealth of Puerto Rico is exempt from local, state, and federal taxes. This enhances the after-tax return for investors and aligns with policies to encourage investment in public projects.
Step-by-step explanation:
The interest from bonds issued by U.S. territories, possessions, and the Commonwealth of Puerto Rico is typically exempt from various forms of taxation. The correct selections for this question are that the interest is exempt from:
- Local Tax
- State Tax
- Federal Tax
This tax-exempt status is beneficial to investors in these bonds because it increases the after-tax return on their investments compared to taxable bonds. Bonds from U.S. territories and possessions offer a unique advantage as the interest they generate is not subject to local, state, or federal tax, which aligns with the broader principle that municipal bonds and bonds issued by sovereign entities within the United States typically enjoy certain tax benefits to encourage investment in public projects and stimulate economic growth.