Unformatted text preview: If that taxpayer invested in municipal bonds that paid the same rate of interest, the taxpayer would end up with $1,000 after tax (since the municipal bond interest is not taxed). We would expect individuals to pay more for a bond that gives them $1,000 after tax than a bond that gives them $650 after tax. Thus, the price of the municipal bonds will be bid up resulting in a lower interest rate for the municipal bond and higher interest rate for the corporate bond. Recall from your Finance class that bond prices and interest rates work in an inverse manner....
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- Spring '11
- Finance, 35%, $1,000, $350, $650