U.S. Treasury securities offer which advantages?

• A. No credit risk, high liquidity, and interest exempt from state income taxes.
• B. Are exempt from federal income tax.
• C. Carry higher credit risk than corporate bonds.
• D. Lack liquidity.

Answer: (A)

U.S. Treasury securities are considered very safe, highly liquid investments with a favorable tax treatment at the state level. They’re backed by the full faith and credit of the U.S. government, so credit risk is essentially zero. The market for Treasuries is one of the most active in the world, which means they can be bought or sold quickly with minimal price impact. Regarding taxes, the interest income is subject to federal income tax but is exempt from state and local income taxes. This combination—near-zero credit risk, strong liquidity, and state tax exemption—explains why this option best describes the advantages of Treasuries. They are not exempt from federal taxes, they do not carry higher credit risk than corporate bonds, and they are not lacking in liquidity.