In late 2012,President Obama proposed raising the top income tax rate.All of the following are likely impacts of higher income tax rates on bonds EXCEPT
A) higher interest rates on Treasury bonds.
B) lower interest rates on Municipal bonds.
C) increased demand for Municipal bonds.
D) lower prices for Municipal bonds.

Question

Quizplus · Accepted Answer

Higher income tax rates make the tax-exempt status of municipal bonds more attractive, increasing their demand (C) and potentially lowering their interest rates (B) as a result. Higher taxes can also lead to expectations of increased government borrowing, potentially raising interest rates on Treasury bonds (A). However, increased demand for municipal bonds would lead to higher, not lower, prices for them, contradicting option (D).

In Late 2012,President Obama Proposed Raising the Top Income Tax