A one-year municipal discount bond and a one-year Treasury bond have both a face value of $11,130.00. The interest rate on the treasury bond is 0.08. The average income tax rate faced by bond market participants is 25 percent. We can conclude that:

Interest rate on municipal bond = ____________

Price of municipal bond = ______________

Price of treasury bond = ________________

Suppose that the income tax rate increases to 50 percent, making treasury bods less attractive. People start selling their treasury bonds to buy municipal bonds. This arbitrage causes the interest rate on treasury bonds to increase to 10 percent. As a result, after the icrease in the tax rate we will have:

Interest rate on municipal bond = ___________

Price of municipal bond = ___________

Price of treasury bond = ____________