Which security is exempt from state taxes?

Treasury notes are exempt from state taxes because they are issued by the federal government. This exemption is a standard policy aimed at encouraging investment in federal securities, as the interest income earned from Treasury securities is subject only to federal income tax and not to state or local taxes. This feature makes Treasury notes particularly attractive to investors who want to minimize their overall tax burden.

In contrast, corporate stock and convertible bonds are issued by corporations and are subject to state taxes, as they do not carry the same federal backing that gives Treasury securities their tax-exempt status. FNMA bonds, while they may have certain advantages, are still subject to state taxes despite being government-sponsored entities. Thus, Treasury notes hold a unique position of being exempt from state taxation, making them a preferred choice for those seeking tax efficiency in their investment strategy.