What does "exempt from taxation" imply in the context of bonds?

In the context of bonds, "exempt from taxation" signifies that the interest income received by bondholders is not subject to federal income tax, and in some cases, state and local taxes as well. This tax advantage tends to make these bonds particularly attractive to investors, as they can effectively yield higher returns after taxes compared to taxable bonds.

Investors often seek out tax-exempt bonds, especially those in higher tax brackets, because the exemption enhances their overall yield. This benefit can lead to increased demand for these bonds, which potentially allows issuers to offer them at lower interest rates compared to taxable bonds. Consequently, the ability to attract more investors due to these tax benefits is the primary reason why being "exempt from taxation" is significant in the bond market.

In comparison to the other options, the focus on interest payments, issue price, and legal obligations does not directly relate to the implications of tax exemption, making them less relevant in this context.