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Which of the following statements is true?
A) Because coupon payments on tax-exempt bonds are exempt from federal income tax, the
expected after-tax return on them will be higher for individuals in higher income tax brackets.
B) An increase in tax rates will decrease the demand for tax-exempt bonds, lowering their
interest rates.
C) Interest rates on tax-exempt bonds will be higher than comparable bonds without the tax
exemption.
D) Because coupon payments on tax-exempt are exempt from federal income tax, the expected
after-tax return on them will be lower for individuals in higher income tax brackets.
Answer: A
Diff: 3 Type: MC Page Ref: 117
Skill: Recall
Objective List: 6.1 Describe how default risk, liquidity, and tax considerations affect interest
rates
Which of the following statements is true?
A) Because coupon payments on tax-exempt bonds are exempt from federal income tax, the
expected after-tax return on them will be higher for individuals in higher income tax brackets.
B) An decrease in tax rates will increase the demand for U.S Treasury bonds, lowering their
interest rates.
C) Interest rates on tax-exempt bonds will be higher than comparable bonds without the tax
exemption.
D) An decrease in tax rates will increase the supply of U.S Treasury bonds, lowering their
interest rates.
Answer: A
Diff: 3 Type: MC Page Ref: 117 - 118
Skill: Recall
Objective List: 6.1 Describe how default risk, liquidity, and tax considerations affect interest
rates
The interest rate on tax-exempt bonds falls relative to the interest rate on U.S. Treasury
securities when ____.
A) there is a major default in the tax-exempt bond market
B) income tax rates are raised
C) tax-exempt bonds become less widely traded
D) corporate bonds become riskier
Answer: B
Diff: 3 Type: MC Page Ref: 117 - 118
Skill: Recall
Objective List: 6.1 Describe how default risk, liquidity, and tax considerations affect interest
rates