Risk premium on municipal bonds will decrease would happen to the risk premiums of municipal bonds if the federal government guarantees today that it will pay creditors if municipal governments default on their payments. Hence, option B is correct.
A risk premium is the extra investment return that an asset is expected to produce over and above the risk-free rate of return. The risk premium on an asset is a sort of remuneration for investors.
It compensates investors for their willingness to take on more risk with a specific investment than with a risk-free asset.
Thus, option B is correct.
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The options are missing from the question-
A. Risk premium on municipal bonds will stay the same.
B. Risk premium on municipal bonds will decrease.
C. Risk premium on municipal bonds will increase.
D. There is not enough information to tell.
