Consider the market for municipal bonds vs. treasury bonds, such as the market for 10- year maturity bonds. We know that municipal bonds are taxed differently, which results in a lower yield on these bonds as compared to treasuries (all else equal). Suppose that
Consider the market for municipal bonds vs. treasury bonds, such as the market for 10- year maturity bonds. We know that municipal bonds are taxed differently, which results in a lower yield on these bonds as compared to treasuries (all else equal). Suppose that
Chapter4: Income Exclusions
Section: Chapter Questions
Problem 58P
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M7
Transcribed Image Text:Consider the market for municipal bonds vs.
treasury bonds, such as the market for 10-
year maturity bonds. We know that municipal
bonds are taxed differently, which results
in a lower yield on these bonds as compared to
treasuries (all else equal). Suppose that
these "tax considerations" on municipal bonds are
eliminated. What impact would this
have on municipal yields vs. treasury yields. Which
yields would likely be higher?
Discuss and provide diagrams to illustrate the
impact. (you must use two diagrams: one
for treasuries and one for municipal bonds; draw
them side by side). Keep in mind that
initially in this question, municipal bonds are more
attractive due to the exemption
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