Separate the bond market into municipal bonds and corporate bonds, if the Presid

Question

Separate the bond market into municipal bonds and corporate bonds, if the President lowers the federal income tax rate by 5% and holding everything else constant:

A) The interest rate on both corporate and municipal bonds should increase.

B) The interest rate on both corporate and municipal bonds should decrease.

C) The interest rate on corporate bonds should increase relative to the rate for municipal bonds (increase the spread between the two).

D) The interest rate on corporate bonds should decrease relative to the rate for municipal bonds (decrease the spread between the two).

Explanation / Answer

B) The interest rate on both corporate and municipal bonds should decrease.

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