Problem
A. Are all municipal bonds exempt from taxes?
B. In 1990 Congress increased the marginal tax rates to 33%. What, if anything, do you think happened to the demand for municipal bonds and why?
C. What are the tax risks associated with investing in a municipal bond?
D. What is the equivalent taxable yield for an investor facing a 40% marginal tax rate who can purchase a tax-exempt municipal bond with a yield of 7.2%?
E. Write down the formula to compute the yield ratio and then, use your understanding of the Treasury bond market and the municipal bond market to argue whether this ratio should generally be greater than, equal to, or less than 1?