Series 7 Exam Question 358: Answer and Explanation

Question: 358

Ginny Goldtrain is a wealthy investor who is in the highest income bracket. Ginny is looking for an investment that would limit her tax liability and put her on equal footing with investors in lower income-tax brackets. Which of the following securities would you MOST likely recommend?

• A. High-yield bonds
• B. CMOs
• C. Municipal bonds
• D. Hedge funds

Correct Answer: C

Explanation:

C. The interest received on municipal bonds is federally tax-free. Because Ginny is in the highest income tax bracket, she can save more tax money by investing in municipal bonds. This strategy will put her on equal footing with other investors because neither high-income nor low-income investors have to pay taxes on the interest received from municipal bonds. Therefore, municipal bonds are more advantageous to investors in high income tax brackets.