Everything else held constant,the interest rate on municipal bonds rises relative to the interest rate on Treasury securities when
A)income tax rates are lowered.
B)income tax rates are raised.
C)municipal bonds become more widely traded.
D)corporate bonds become riskier.

Question

Quizplus · Accepted Answer

When income tax rates are lowered, the tax-exempt status of municipal bonds becomes less valuable, leading investors to demand higher interest rates relative to taxable bonds like Treasury securities to compensate for the lower tax advantage.

Everything Else Held Constant,the Interest Rate on Municipal Bonds Rises