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Compare the rate of a 10-year Treasury bond to a 10-year municipal bond. Which type of...

Compare the rate of a 10-year Treasury bond to a 10-year municipal bond. Which type of bond would offer you a higher annual yield based on your tax bracket, given that the municipal bond is not subject to federal income taxes?

a. Determine the premium contained in the yield of a 10-year corporate A-rated bond as compared with the 10-year Treasury Bonds

b. Compare that the premium that existed one month ago. Did the premium increase or decrease?

c. Offer an explanation for the change. Is the change attributed to economic conditions?

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Answer #1

a) The difference of premium between corporate bond and treasury bond is credit risk premium.

b) The both premiums would have increased by increasing duration. the factor to increase premium is duration i.e increasing duration risk ( longer the duration of bond = more the risk and so,more the premiums )

The difference in premiums of both bonds will be same as duration risk is in both the bonds.

c) change is not attributed to economic conditions,it is due to increasing duration of bond.

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