Asked by Sarah Gascon on Jun 17, 2024
Verified
Which of the following is true concerning interest rates on bonds?
A) Because of the tax advantage, municipal bonds pay higher interest rate than other bonds.High default risk makes the interest rate on a bond higher than otherwise.
B) Because of the tax advantage, municipal bonds pay higher interest rate than other bonds.High default risk makes the interest rate on a bond lower than otherwise.
C) Because of the tax advantage, municipal bonds pay lower interest rate than other bonds.High default risk makes the interest rate on a bond higher than otherwise.
D) Because of the tax advantage, municipal bonds pay lower interest rate than other bonds.High default risk makes the interest rate on a bond lower than otherwise.
Municipal Bonds
Debt securities issued by municipalities to finance public projects, such as building schools or highways, generally offering tax-exempt interest payments to investors.
Tax Advantage
Financial benefits that accrue due to preferential tax treatment of certain investments or transactions.
- Acquire knowledge about the connection between risk and profit in investment options.
- Acquire knowledge about how tax strategies influence investment decisions and the cost of borrowing.
Verified Answer
EC
Edward Captain-LarryJun 24, 2024
Final Answer :
C
Explanation :
Municipal bonds typically offer lower interest rates compared to other bonds due to their tax-exempt status, making them more attractive to investors in higher tax brackets. Additionally, bonds with a high default risk must offer higher interest rates to compensate investors for the increased risk of losing their investment.
Learning Objectives
- Acquire knowledge about the connection between risk and profit in investment options.
- Acquire knowledge about how tax strategies influence investment decisions and the cost of borrowing.