Question

everything else held constant, the interest rate on municipal bonds rises relative to the interest rate on treasury securities when a. municipal bonds become more widely traded. b. income tax rates are lowered. c. income tax rates are raised. d. corporate bonds become riskier.

Answer 1

Interest rates would increase since the tax-exempt status of municipal bonds would lose some of its appeal and there would be less of a market for them as a result of the lower income tax rates.

When the income tax rate is reduced for municipal bonds, the value of the bonds will also decline because the tax-exempt status for the bonds will also be reduced as a result of the lower income tax rate. Additionally, it lessens the demand for municipal bonds.

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