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Explain why you agree or disagree with the following statement: "If the highest marginal income tax...

Explain why you agree or disagree with the following statement: "If the highest marginal income tax rate is reduced, municipal bond yields are likely to go up relative to yields of otherwise similar corporate bonds." (Maximum 3 sentences, maximum 100 words.)

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Answer #1

Yes i completely agree with this statement.

Due to lower taxes, municipal bonds shall take a hit. The basic feature which is attractive to municipal bonds is that the interest paid on these bonds is tax free. Free of taxes from Federal and State taxes.

Due to lowering of taxes, the amount earned by tax exemption due to buying municipal bonds decreases. A fall in the marginal tax rate from 43% to 33%, will lead to a fall in savings from $4,300 to $3,300. Due to the lower taxes, the demand for municipal bonds fall , so yes the bonds will have to offer higher yield to investors in order to attract them into buying these bonds.

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