Holding all other factors that affect yields constant, following passage of the Tax Reform Act of 1986which lowered marginal income tax ratesyields on
A)municipal bonds should have fallen relative to yields on U.S. Treasury securities.
B)U.S. Treasury securities should have fallen relative to yields on corporate bonds.
C)municipal bonds should have risen relative to yields on corporate bonds.
D)corporate bonds should have risen relative to the yields on U.S. Treasury securities.

Question

Quizplus · Accepted Answer

Municipal bonds are typically exempt from federal income taxes. Therefore, when marginal income tax rates decrease, the tax-exempt status of municipal bonds becomes relatively less valuable, causing their yields to fall relative to taxable securities such as U.S. Treasury securities.

Holding All Other Factors That Affect Yields Constant, Following Passage