ACME Investments manages a very successful Municipal Bond Fund. The fund invests in State, Local and Municipal Revenue Bonds. These bonds typically pay a lower coupon rate because the income from the bonds is Federal Tax Free. ACME does not speculate on interest rate changes, but relies on pure credit analysis. They wish to insulate their portfolio from interest volatility by hedging using US Treasury Bill Futures. The average yield on ACMEs holdings as of June 30 is 3.15%. The yield on a portfolio of Treasuries of comparable maturities is 4.65%. The lower muni yield is due to the tax exempt nature of the income. Over the summer, a bill to enhance US government revenue is introduced into Congress with wide bipartisan support. Among its provisions is the elimination, or sharp reduction of the tax exempt status of Municipal Bonds.

a. Assuming widespread belief that some version of this bill will pass, what is the probable impact on the value of the bonds in ACMEs Municipal Bond Fund?

i. Increase

ii. Decrease

iii. Neutral

b. What is the probable impact on a comparable portfolio of US Treasuries?

i. Increase

ii. Decrease

iii. Neutral

c. What is the probable impact on the value of ACMEs hedges based on US Treasury Futures?

i. Increase

ii. Decrease

iii. Neutral