The interest rate on tax-exempt bonds rises relative to the interest rate on U.S. Treasury securities when ________.
A) income tax rates are raised
B) tax-exempt bonds become more widely traded
C) corporate bonds become riskier
D) income tax rates are lowered

Question

Quizplus · Accepted Answer

When income tax rates are lowered, the tax advantage of tax-exempt bonds decreases, making them less attractive relative to taxable U.S. Treasury securities, causing their interest rates to rise.

The Interest Rate on Tax-Exempt Bonds Rises Relative to the Interest