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Series 7 practice questionmediumDebt Securities — Municipal Bonds — AMT Bonds

Which type of municipal bond interest may be subject to the Alternative Minimum Tax (AMT)?

  1. AGeneral obligation bonds issued for public schools
  2. BPrivate activity bonds used to finance a private company's facility✓ Correct answer
  3. CRevenue bonds issued for a public water system
  4. DPre-refunded bonds escrowed to maturity
Explanation

Why B — Private activity bonds used to finance a private company's facility

Interest on private activity bonds (such as industrial development bonds issued for the benefit of private companies) is generally subject to the Alternative Minimum Tax. While the interest is still exempt from regular federal income tax, it is considered a preference item for AMT purposes. Bonds issued for essential public purposes (schools, water systems, public roads) are typically exempt from AMT.

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