The best answer is C.
The rules on taxation of interest income received, generally, are:
Treasury/Agency Issues: Interest is subject to Federal Income tax, but is exempt from State and Local tax
Municipal Issues: Interest is exempt from Federal Income tax, and exempt from State and Local tax when purchased by a resident of that state
Corporate Issues: Interest is subject to Federal Income tax, and to State and Local tax
If the customer buys the Treasury bond yielding 4.0%, 35% of the yield will go to the Federal Government, so the after-tax yield is (.65 x 4.00%) = 2.60%.
If the customer buys the Federal Home Loan Bank bond yielding 4.50%, 35% of the yield will go to the Federal Government, so the after-tax yield is (.65 x 4.50%) = 2.925%.
If the customer buys the Corporate bond yielding 6.00%, 35% of the yield will go to the Federal Government and 10% to the State Government, so the after-tax yield is (.55 x 6.00%) = 3.30%.
If the customer buys the Municipal bond yielding 3.50%, there is no tax on the income received at either the Federal or State level, so the after-tax yield is 3.50%.