If security purchasers found the after-tax yield on municipal bonds higher than that of corporate bonds, leading to an increase in municipal bond purchases and an increase in corporate bond sales, this would cause the
A)yields on municipals to increase.
B)prices on corporate bonds to increase.
C)yields on corporate bonds to decrease.
D)yields on municipals to decrease.

Question

Quizplus · Accepted Answer

An increase in demand for municipal bonds and a decrease in demand for corporate bonds would cause the yield on municipal bonds to decrease (due to increased competition among buyers driving down the yield), while the yield on corporate bonds would increase (due to decreased demand driving up the yield).

If Security Purchasers Found the After-Tax Yield on Municipal Bonds