Which of the following statements is true?
A) Because coupon payments on tax-exempt bonds are exempt from federal income tax, the expected after-tax return on them will be higher for individuals in higher income tax brackets.
B) An increase in tax rates will decrease the demand for tax-exempt bonds, lowering their interest rates.
C) Interest rates on tax-exempt bonds will be higher than comparable bonds without the tax exemption.
D) Because coupon payments on tax-exempt are exempt from federal income tax, the expected after-tax return on them will be lower for individuals in higher income tax brackets.

Question

Quizplus · Accepted Answer

Because the coupon payments on tax-exempt bonds are exempt from federal income tax, individuals in higher income tax brackets will have a higher after-tax return due to their larger tax liabilities. This is because they would otherwise have to pay a higher tax rate on the interest income from taxable bonds. Therefore, option A is true. Option B is incorrect because a decrease in demand would actually raise the interest rates on tax-exempt bonds. Option C is incorrect because tax-exempt bonds usually have lower interest rates than comparable taxable bonds. Option D is incorrect because higher income tax brackets generally lead to a higher after-tax return due to the tax-exempt status of the bond coupon payments.

Which of the Following Statements Is True