Which of the following statements are true?
A) Because coupon payments on municipal bonds are exempt from federal income tax, the expected after-tax return on them will be higher for individuals in higher income tax brackets.
B) An increase in tax rates will increase the demand for Treasury bonds, lowering their interest rates.
C) Interest rates on municipal bonds will be higher than on comparable bonds without the tax exemption.
D) Only A and B are true statements.

Question

Quizplus · Accepted Answer

Municipal bonds are attractive to individuals in higher tax brackets because their interest income is exempt from federal income tax, effectively increasing the after-tax return for these investors. This makes statement A true. Statement B is incorrect because an increase in tax rates generally increases the demand for tax-exempt or tax-advantaged securities, such as municipal bonds, not Treasury bonds. Treasury bonds are taxable, so higher tax rates would not make them more attractive. Statement C is incorrect because the tax exemption on municipal bonds typically allows them to have lower interest rates than comparable taxable bonds, as investors are willing to accept a lower rate due to the tax benefits.

Which of the Following Statements Are True