An increase in the tax rate on dividends,other things equal,is likely to result in a(n)
A) increased demand for bonds due to an increase in the expected return on bonds relative to stocks.
B) increased supply of bonds due to an increase in the expected return on bonds relative to stocks.
C) reduced demand for bonds due to a decrease in the expected return on bonds relative to stocks.
D) reduced demand for bonds due to an increase in the expected return on bonds relative to stocks.

Question

Quizplus · Accepted Answer

An increase in the tax rate on dividends makes stocks less attractive because the after-tax return on stocks decreases. As a result, investors may shift their preference towards bonds, increasing the demand for bonds due to their relatively more attractive expected return compared to stocks.

An Increase in the Tax Rate on Dividends,other Things Equal,is