Information about Interest Income Needed for the Series 7 Exam
For the Series 7 exam, you need to understand how dividends, interest, capital gains, and capital losses affect investors. Interest income that bondholders receive may or may not be taxable, depending on the type of security or securities held:
Corporate bond interest: Interest received from corporate bonds is taxable on all levels (federal, state, and, local, where local taxes exist).
Municipal bond interest: Interest received from municipal bonds is federally tax free; however, investors may be taxed on the state and local levels, depending on the issuer of the bonds.
U.S. government securities interest: Interest received from U.S. government securities, such as T-bills, T-notes, T-STRIPS, and T-bonds, is taxable on the federal level but is exempt from state and local taxes.
Even though T-bills, T-STRIPS, and any other zero-coupon bonds don’t generate interest payments (because the securities are issued at a discount and mature at par), the difference between the purchase price and the amount received at maturity is considered interest and is subject to taxation.