The interest rate on tax-exempt bonds falls relative to the interest rate on U.S. Treasury securities when ________.
A) there is a major default in the tax-exempt bond market
B) income tax rates are raised
C) tax-exempt bonds become less widely traded
D) corporate bonds become riskier

Question

Quizplus · Accepted Answer

Tax-exempt bonds are more attractive to investors when income tax rates are higher because they provide a higher after-tax yield. As a result, demand for tax-exempt bonds increases and their interest rates fall relative to U.S. Treasury securities.

The Interest Rate on Tax-Exempt Bonds Falls Relative to the Interest