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If the tax-exempt status of municipal bonds were abolished, how would the interest rate on these...

If the tax-exempt status of municipal bonds were abolished, how would the interest rate on these bonds change? How would the interest rate on US treasury bonds change? Use graphs to explain the changes in both markets.

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Answer #1

If tax exemption were abolished , this would decrease the desirability of municipal bonds versus treasury bonds. The demand for municipal bonds would decrease and demand for treasury bonds . This we can see in the following graphs:

We can see from the graph that as demand for municipal bonds decrease, price of bonds decrease . And therefore, interest rate rises.

And When demand for treasury bonds increases, price of bonds decrease . And therefore, interest rate falls.

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