What characteristic makes a bond a good candidate for a tax-exempt investment?

A bond becomes a strong candidate for tax-exempt investment primarily due to its exemption from federal income tax. This characteristic is particularly appealing to investors in higher tax brackets, as it allows them to keep more of their interest income. Tax-exempt bonds, such as municipal bonds, are often issued by state and local governments, and the interest earned on them is not subject to federal taxes. In some cases, these bonds may also be exempt from state and local taxes, depending on the investor's state of residence. This tax benefit can significantly enhance the effective yield on the investment, making it an attractive option for conservative investors looking to preserve their wealth and maximize after-tax returns.