If a local government eliminates the tax exemption on municipal bonds, we'd expect to see:
A) an increase in the yield on taxable bonds.
B) a decrease in the gap in yields on taxable and tax-exempt bonds.
C) a decrease in the yield on municipal bonds.
D) municipal bonds will become more attractive to investors.

Question

Quizplus · Accepted Answer

Eliminating the tax exemption on municipal bonds would make them less attractive compared to taxable bonds, as one of their main advantages (being tax-exempt) disappears. This would likely lead to a decrease in the gap in yields between taxable and tax-exempt bonds, as municipal bonds would need to offer higher yields to attract investors, moving their yields closer to those of taxable bonds.

If a Local Government Eliminates the Tax Exemption on Municipal