Question

Suppose that the Federal government decides to reduce the tax advantage of municipal bonds, relative to US Treasury bonds. In this case, we would expect that the equilibrium yield in the municipal bond market will ____ and the yield in the US Treasury bonds market will ____.

Group of answer choices

fall; rise

fall; fall

rise; rise

rise; fall

Answer 1

The answer to the question is :-

D) rise, fall

The answer to the question is justified because reducing the tax advantages component will make them riskier and thus yield will increase since the cash flows will be used to pay higher tax whereas on the treasury bond since risk is less the yield will be less too.

Because of the concept justified rest of the options are incorrect

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