Suppose There Is a Reduction of the Return Provided on U.S.Treasury

question 35

Multiple Choice

Suppose there is a reduction of the return provided on U.S.Treasury bonds.We should expect the current price of stocks to:

• A)Increase since the risk-free return is now lower.
• B)Decrease since U.S.Treasury bonds are safer.
• C)Increase since the risk premium on the stocks will increase.
• D)Stay the same; there is no effect on stock prices from this reduction.

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Definitions:

Circular 230

A set of regulations governing tax professionals issued by the United States Treasury Department.

Tax Preparers

Professionals skilled in preparing and filing tax returns on behalf of individuals and businesses to ensure compliance with tax laws.

Tax Rate Structure

The method or system by which taxes are levied on income, goods, services, and properties, which can be progressive, regressive, or proportional.

Proportional

A tax structure where the rate remains constant regardless of income level.