What is typically true about interest paid on certain bonds?

The interest paid on certain bonds is often exempt from federal income tax, particularly in the case of municipal bonds. These bonds are issued by states and local governments, and the interest income is typically excluded from federal taxation to encourage investment in public projects. This tax-exempt status makes them an attractive option for investors, especially those in higher tax brackets, as they can offer a better net return compared to taxable investments.

While it's true that not all bonds have tax-exempt interest—such as corporate bonds which are subject to federal income tax—municipal bonds are a significant category where this exemption applies. This understanding is essential for fiscal planning and investment, as it influences the overall yield an investor may receive based upon their individual tax situation and investment strategy.