If the federal government were to guarantee payment on municipal bonds,the yield on municipal bonds would ________ and the yield on U.S. Treasury bonds would ________,all else equal.
A)decrease;increase
B)increase;increase
C)increase;decrease
D)decrease;decrease

Question

Quizplus · Accepted Answer

If the federal government guarantees payment on municipal bonds, investors will perceive them as less risky and demand for them will increase. As a result, the price of the bonds will increase and the yield will decrease. On the other hand, since U.S. Treasury bonds are already considered to be risk-free, their demand and price will not be affected by the guarantee on municipal bonds. Therefore, the yield on U.S. Treasury bonds will increase relative to municipal bonds, making them relatively more attractive to investors.

If the Federal Government Were to Guarantee Payment on Municipal