Question

1. A increase in the tax rate causes ______ in the interest rate on tax exempt bonds, such as municipal bonds.

A. increase

B. Decrease

C. No change

2.Suppose your marginal income tax rate is 20%.If a corporate bond pays

15%,then the interest rate that an otherwise identical municipal bond have to pay in order for you to be indifferent between holding the corporate bond and the municipal bond is

_____ %.

(Round your response to the nearest whole number).

3.

The U.S. Treasury offers some of its debt as Treasury Inflation Protected Securities, or TIPS, in which the price of bonds is adjusted for inflation over the life of the debt instrument. TIPS bonds are traded on a much smaller scale than nominal U.S. Treasury bonds of equivalent maturity. What can you conclude about the liquidity premium between TIPS and nominal U.S. bonds?

A - The difference in the liquidity premium between TIPS and nominal U.S. bonds usually results in a higher yield on nominal U.S. bonds.

B - The liquidity premium for a TIPS bond is usually smaller than inflation compensation in nominal U.S. bond yields of equal maturity.

C - The liquidity premium for a TIPS bond is high, so it is more profitable than a nominal U.S. bond of equal maturity.

D -

Both TIPS and nominal U.S. bonds are equally liquid, so there is no liquidity premium

Answer #1

If the tax-exempt status of municipal bonds were abolished, how
would the interest rate on these bonds change? How would the
interest rate on US treasury bonds change? Use graphs to explain
the changes in both markets.

A tax-exempt municipal bond has a yield to maturity of 3.91%. An
investor, who has a marginal tax rate of 33.00%, would prefer and
an otherwise identical taxable corporate bond if it had a yield to
maturity of more than ____%.
Round to 2 decimal places.

For the following questions, assume the following. The real rate
of interest is 2.5%, the maturity risk premium = (t-1)0.1% (where t
is time to maturity in years), the liquidity risk premium is 1.4%,
and inflation is expected to be 3% each year for the foreseeable
future.
a. What would be the yield today on a 10-year U.S. Treasury note
that has 5 years to remain until the maturity? b. You find yields
for two 5-year corporate bonds, Dell and...

Assume that the City of Rockwall sold an issue of $1,000
maturity value, tax-exempt (municipal bond), zero coupon bonds 5
years ago. The bonds had a 25-year maturity when they were issued,
and the interest rate built into the issue was a nominal 10
percent, but with semiannual compounding. The bonds are now
callable at a premium of 10 percent over the accrued value. What
effective annual rate of return would an investor who bought the
bonds when they were...

show all works
1. The real risk-free rate of interest is 1%. Inflation is
expected to be 4% the next 2 years and 7% during the next 3 years
after that. Assume that the maturity risk premium is zero. What is
the yield on 3-year Treasury securities? (5 points)
2. The real risk-free rate of interest is 2.5%. Inflation is
expected to be 2% the next 2 years and 4% during the next 3 years
after that. Assume that the...

1. The real risk-free rate is 2.6%. Inflation
is expected to be 2.15% this year, 4.15% next year, and 2.65%
thereafter. The maturity risk premium is estimated to be 0.05 × (t
- 1)%, where t = number of years to maturity. What is the
yield on a 7-year Treasury note? Do not round your intermediate
calculations. Round your answer to two decimal places.
2. A company's 5-year bonds are yielding 9.75%
per year. Treasury bonds with the same maturity...

A tax-exempt municipal bond with a coupon rate of 4.00% has a
market price of 98.77% of par. The bond matures in 17.00 years and
pays semi-annually. Assume an investor has a 16.00% marginal tax
rate. The investor would prefer otherwise identical taxable bond if
it's yield to maturity was more than _____%

Suppose that your marginal federal income tax rate is
20%, and the yield on thirty-year U.S. treasury bonds is 2.5% and
the yield on thirty-year municipal bond 2.2%. What is the tax
adjusted risk premium on the municipal bond?

A tax-exempt municipal bond with a coupon rate of 6.00% has a
market price of 99.34% of par. The bond matures in 20.00 years and
pays semi-annually. Assume an investor has a 26.00% marginal tax
rate. The investor would prefer otherwise identical taxable bond if
it's yield to maturity was more than _____% (round to 2
decimals)

answer for part a, and b
Suppose the interest rate on a taxable corporate bond is 4
percent while a municipal, tax exempt bond has an interest rate of
3 percent, and they are similar in every other way.
a. Assuming the income tax rate is 30 percent, calculate the
after tax interest rate on the corporate bond. Is it higher or
lower than the after tax return on the municipal bond?
b. What is the income tax rate that...

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