Municipal bonds have default risk,yet their interest rates are lower than the rates on default-free Treasury bonds.This suggests that
A) the benefit from the tax-exempt status of municipal bonds is less than their default risk.
B) the benefit from the tax-exempt status of municipal bonds equals their default risk.
C) the benefit from the tax-exempt status of municipal bonds exceeds their default risk.
D) Treasury bonds are not default-free.

Question

Quizplus · Accepted Answer

The fact that municipal bonds have lower interest rates despite default risk suggests that the benefit from their tax-exempt status is greater than their default risk. This means investors are willing to accept a lower rate of return for the tax benefits offered by municipal bonds.

Municipal Bonds Have Default Risk,yet Their Interest Rates Are Lower