If a municipal bond bought in the secondary market is held until maturity, which of the following statements are true?

When a municipal bond is purchased in the secondary market and held until maturity, the interest income earned from that bond is indeed exempt from federal taxes. This characteristic is what often makes municipal bonds attractive to investors, particularly those in higher tax brackets. The nature of municipal bonds is such that the interest is issued by state or local governments for public purposes, and as a result, the federal government provides tax incentives in the form of tax-exempt interest.

It’s also important to note that if the bond is sold for more than its purchase price, a capital gain may occur, which is typically subject to federal taxation. However, this scenario involves holding the bond to maturity, meaning that no capital gain tax would apply, as there is no sale involved. Therefore, the tax-exempt nature of the interest earned throughout the period of holding the bond remains the key point affirming the correctness of the statement regarding federal tax exemption on interest income from municipal bonds.