What is Municipal Bond?

B is correct. The municipal bond's tax-equivalent yield is 3.9% ÷ (1 - 0.35) = 3.9% ÷ 0.65 = 6.0%, which exceeds the corporate bond's 5.5% taxable yield. Since Jennifer is in a high tax bracket, the tax-exempt municipal bond provides superior after-tax returns. As a California resident buying California munis, she may also receive state tax exemption, further enhancing returns.

A is incorrect because it ignores the tax benefit, focusing only on nominal yield rather than after-tax return. C is incorrect because it misstates credit risk; investment-grade municipal bonds typically have lower default rates than similarly-rated corporate bonds. D is incorrect because only municipal bond interest is tax-exempt, not corporate bond interest, and the state tax exemption applies only to in-state municipal bonds.

C is correct. General Obligation (GO) bonds are backed by the full faith, credit, and taxing power of the issuing municipality. This includes property taxes (ad valorem taxes), income taxes, sales taxes, and other general revenues. The issuer's ability to raise taxes to meet debt obligations makes GO bonds generally safer than revenue bonds.

A (project revenue) is incorrect because this describes revenue bonds, not GO bonds. B (U.S. government backing) is incorrect because municipal bonds are state and local government obligations, not backed by federal guarantee. D (specific collateral) is incorrect because GO bonds are unsecured by physical assets; they rely on the issuer's taxing authority rather than pledged property.

B is correct. The tax-equivalent yield formula is: municipal yield ÷ (1 - tax bracket) = 4.5% ÷ (1 - 0.37) = 4.5% ÷ 0.63 = 7.14%. This means a taxable bond would need to yield 7.14% to provide the same after-tax return as the 4.5% tax-exempt municipal bond for an investor in the 37% bracket.

A (6.15%) uses an incorrect denominator calculation. C (2.84%) incorrectly calculates the after-tax yield of a 4.5% taxable bond (4.5% × 0.63 = 2.84%), which is the reverse of what the question asks. D (4.50%) is simply the municipal yield without any tax adjustment, ignoring the tax benefit entirely.

C is correct (the EXCEPT answer). Revenue bonds are NOT backed by the full faith and credit of the issuing government. They are backed only by the revenue generated from the specific project they finance (tolls, user fees, lease payments, etc.). This fundamental distinction makes revenue bonds generally riskier than GO bonds from the same issuer.

A is accurate: municipal bond interest is exempt from federal income tax for most issues (except some private activity bonds subject to AMT). B is accurate: GO bonds typically require voter approval because they pledge the municipality's taxing power and create general obligations. D is accurate: municipal bonds purchased by residents of the issuing state often qualify for state tax exemption ("double tax-free" or "triple tax-free" if also exempt from local taxes).

B is correct. Statements 3 and 4 are accurate.

Statement 1 is FALSE: Revenue bonds do NOT require voter approval because they are backed by project revenue, not the municipality's taxing power or general obligation.

Statement 2 is FALSE: Revenue bonds are NOT backed by taxing authority. They are secured only by the specific revenue stream from the financed project (in this case, airline lease payments and passenger facility charges).

Statement 3 is TRUE: Bondholders face risk if the revenue source declines. If airline traffic drops significantly, lease payments and passenger fees could decrease, potentially jeopardizing debt service payments.

Statement 4 is TRUE: Revenue bonds typically yield more than GO bonds from the same issuer because they carry higher credit risk. The project-specific revenue backing is generally considered less secure than the broad taxing power backing GO bonds.