Which of the following is true about municipal bonds?

Municipal bonds are typically issued by states, cities, or other local government entities to finance public projects. One of the most significant features of municipal bonds is that the income generated from these investments is usually exempt from federal income taxes. This tax-exempt status makes them attractive to investors, particularly those in higher tax brackets, as it allows them to earn interest income without the burden of federal taxes.

While some municipal bonds may also be exempt from state income taxes, this exemption can vary depending on the investor's state of residence and the specific bond issued. Therefore, this tax benefit plays a crucial role in their appeal, as investors can effectively receive a higher after-tax return.

The other statements assert incorrect scenarios regarding municipal bonds. They are not subject to taxation at both federal and state levels, as indicated in the first choice. The third statement about value fluctuation is misleading because municipal bonds, like any investment, can experience price changes due to interest rate fluctuations and credit risk. Finally, the idea that they are always guaranteed by the federal government is not accurate, as municipal bonds are generally backed by the issuing municipality and not the federal government. This emphasizes the distinction in the nature of guarantees with municipal versus federal obligations. Ultimately, the recognition of the tax-ex