the economics of money, banking, and financial markets

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46. 
    

    If income tax rates were lowered, then ____.
    A) the interest rate on tax-exempt bonds would rise
    B) the interest rate on U.S. Treasury bonds would rise
    C) the interest rate on tax-exempt bonds would fall
    D) the interest rate on tax-exempt bonds would stay the same
    Answer: A
    Diff: 2 Type: MC Page Ref: 117 - 118
    Skill: Applied
    Objective List: 6.1 Describe how default risk, liquidity, and tax considerations affect interest
    rates

    
    


47. 
    

    Three factors explain the risk structure of interest rates: ____.
    A) liquidity, default risk, and the income tax treatment of a security
    B) maturity, default risk, and the income tax treatment of a security
    C) maturity, liquidity, and the income tax treatment of a security
    D) maturity, default risk, and the liquidity of a security
    Answer: A
    Diff: 1 Type: MC Page Ref: 118
    Skill: Applied
    Objective List: 6.1 Describe how default risk, liquidity, and tax considerations affect interest
    rates

    
    


48. 
    

    The spread between the interest rates on Baa corporate bonds and Canada bonds was very
    large during the Great Depression years 1930-1933. Explain this difference using the bond
    supply and demand analysis.
    Answer: During the Great Depression many businesses failed. The default risk for the corporate
    bond increased compared to the default-free Treasury bond. The demand for corporate bonds
    decreased while the demand for Treasury bonds increased resulting in a larger risk premium.
    Diff: 3 Type: SA Page Ref: 114
    Skill: Applied
    Objective List: 6.1 Describe how default risk, liquidity, and tax considerations affect interest
    rates

    
    


49. 
    

    If the U.S. government where to raise the income tax rates, would this have any impact on a
    state's cost of borrowing funds? Explain.
    Answer: Yes, if the U.S. government raises income tax rates, demand for municipal bonds
    which are federal income tax exempt would increase. This would lower the interest rate on the
    municipal bonds thus lowering the cost to the state of borrowing funds.
    Diff: 3 Type: SA Page Ref: 117 - 118
    Skill: Applied
    Objective List: 6.1 Describe how default risk, liquidity, and tax considerations affect interest
    rates