Assume congress passes a law that makes interest on 20 year bonds tax free (no taxes on 20 year bond interest), but interest on 1 year bonds is still taxed. Given this information you would expect the term structure to move to a ....
steeper slope because demand for 20 year bonds would decrease.
flatter slope because demand for 20 year bonds would increase.
flatter slope because demand for 20 year bonds would decrease.
steeper slope because demand for 20 year bonds would increase.
Homework Answers
steeper slope because demand for 20 year bonds would increase.
Exemption on tax on interest payment of 20 years bond increases the effective interest rate of 20 year bond thus demand for 20 years bond increases.
Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.
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