An increase in income tax rates will cause the interest rates on tax-exempt municipal bonds to fall relative to the interest rate on taxable corporate securities.

Question

Quizplus · Accepted Answer

When income tax rates increase, the demand for tax-exempt municipal bonds increases as investors look for ways to reduce their tax liability. This increased demand for tax-exempt municipal bonds causes their interest rates to fall relative to taxable corporate securities.

An Increase in Income Tax Rates Will Cause the Interest