Final answer:
A feasibility study is crucial for revenue bonds because their repayment is dependent on the revenue from the project they finance. When interest rates rise, existing bonds with lower rates become less attractive, and their market price typically decreases. Hence, the correct answer is option (c).
Step-by-step explanation:
A feasibility study is typically required for a revenue bond, which is a type of municipal bond. The student asked which of the following municipal bonds would require a feasibility study to determine the issuer's ability to pay interest when due.
The correct answer is c. A revenue bond. Revenue bonds are not backed by taxes but by the revenues from a specific project or source, such as a highway toll or a water utility fee. Therefore, the issuer's ability to pay interest and principal on the bond is directly linked to the revenue generated from the project. This makes a feasibility study critical for assessing whether the project can generate sufficient revenue.
When considering the purchase of a bond, such as a $10,000 ten-year bond at an interest rate of 6%, if the interest rates rise to 9% one year before the bond's maturity, you would expect to pay less than $10,000 for the bond because the fixed interest rate is lower than the current market rate.