The ________ the ratio of municipal bond yields to corporate bond yields, the ________ the cutoff tax bracket at which more individuals will prefer to hold municipal debt.
A) higher; lower
B) lower; lower
C) higher; higher
D) The answer cannot be determined without more information.

Question

Quizplus · Accepted Answer

When the ratio of municipal bond yields to corporate bond yields increases, the tax-equivalent yield of municipal bonds also increases. This makes municipal bonds more attractive to investors in higher tax brackets, since they can earn the same after-tax yield with less risk. Therefore, the cutoff tax bracket at which more individuals will prefer to hold municipal debt will be lower when the ratio of municipal bond yields to corporate bond yields is higher.

The ________ the Ratio of Municipal Bond Yields to Corporate