a. Is the interest received from government obligations taxable? Explain.
- Interest on U.S. government obligations (issued after February 29, 1942) and foreign government obligations.
- There are exceptions for federally insured loans, arbitrage, and private activity bonds.

b. What impact does the fact that some bond interest is tax-exempt have on interest rates?
- Interest on obligations of states, territories, U.S. possessions, and their political subdivisions.
- In general, tax-exempt bonds pay a lower interest rate than taxable bonds because they provide tax benefits.

c. Is an investor always better off buying tax-exempt bonds? Explain.
A. No. In general, investors in lower tax brackets are better off investing in taxable bonds because their after-tax return is generally higher.
B. No. In general, investors are never better off investing in tax-exempt bonds.
C. No. In general, investors in higher tax brackets are better off investing in taxable bonds because their after-tax return is generally lower.
D. Yes. In general, investors are always better off investing in tax-exempt bonds.