2. Describe and explain the expected effect on state-local bond interest rates of each of the...
2. Describe and explain the expected effect on state-local bond interest rates of each of the following federal changes. (4 points)
a. The federal government lowers the maximum federal personal income-tax rate from 39% to 20%.
b. The federal government restricts the use of private activity tax- exempt bonds by state-local governments with a federal law.
Homework Answers
A. State-local bond interest rates will fall. This is because the availability of funds in the market will increase due to a cut in the tax rate, hence bond interest rates will fall since funds are readily available and investors will settle for a lower rate of interest.
B. State-local bond interest rates will increase. Since states and local bodies can't use funds from private activity bonds, they will have to rely on the general state local bonds for funding. Hence they will offer a higher interest rate to generate a greater amount of funds.
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