An investor who wants a tax-free return but does not want a high risk of principal should invest in which TWO of the following?I Treasury billsII A tax-exempt money-market fundIII Short-term revenue anticipation notesIV Long-term revenue bonds with a high ratingI and III and IVII and IIIII and IV
II and IIIA tax-exempt money-market fund would invest in short-term tax-exempt obligations such as tax anticipation notes and revenue anticipation notes. There is an expectation of stable principal as these notes have short-term maturities (less than one year). A long-term revenue bond is federally tax-free but subject to market risk, interest-rate risk, and some credit risk.
The investor who wants a tax-free return but does not want a high risk of principal should invest in options I (Treasury bills) and II (a tax-exempt money-market fund).
Treasury bills are short-term debt obligations issued by the U.S. government. They have a maturity of one year or less and are considered to be one of the safest investments available. They are also exempt from state and local taxes. Hence, they provide a low-risk investment option for the investor looking for a tax-free return.
A tax-exempt money-market fund is a mutual fund that invests in short-term, low-risk securities, such as Treasury bills and municipal bonds. These funds generate tax-free income for the investor while also providing low-risk investment options.
Short-term revenue anticipation notes and long-term revenue bonds with a high rating may offer higher returns than Treasury bills and money-market funds, but they also come with higher risk. These options are not the best choice for an investor looking for a tax-free return with low risk of principal.
Therefore, the optimal choices for an investor who wants a tax-free return but does not want a high risk of principal are I (Treasury bills) and II (a tax-exempt money-market fund).
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