3: Questions and Applications 4 and 9; Problems 2, 4, and 5
Effects on Yields Do investors in high tax brackets or those in low tax
brackets benefit more from tax-exempt securities? Why? At a given point in
time, which offers a higher before-tax yield: municipal bonds or corporate
bonds? Why? Which has the higher after-tax yield? If taxes did not exist, would
Treasury bonds offer a higher or lower yield than municipal bonds with the same
of Liquidity Premium on Forward Rate Explain how consideration of a liquidity
premium affects the estimate of a forward interest rate
Rate Assume that, as of today, the annualized interest rate on a three-year
security is 10 percent and the annualized interest rate on a two-year security
is 7 percent. Use only this information to esti- mate the one-year forward rate
two years from now.
Yield You need to choose between investing in a one-year municipal bond with a
7 percent yield and a one-year corporate bond with an 11 percent yield. If your
marginal federal income tax rate is 30 percent and no other differences exist
between these two securities, which one would you invest in?
Current Interest Rates Assume that interest rates for one-year securities are
expected to be 2 percent today, 4 percent one year from now, and 6 percent two
years from now. Using only pure expecta- tions theory, what are the current
interest rates on two- year and three-year securities?
Chapter 4: Questions and Applications 1, 10, 15, 16, and 19
1. The Fed
Briefly describe the origin of the Federal Reserve System. Describe the
functions of the Fed district bank.
10. Effect on Money Supply Why do the Fed’s open market
operations have a different effect on the money supply than do transactions
between two depository institutions?
15. The Fed’s Impact on Home Purchases Explain how the Fed
influences the monthly mortgage payments on homes. How might the Fed indirectly
influence the total demand for home by consumers?
16. The Fed’s Impact on Security Prices Explain how the
Fed’s monetary policy may indirectly affect the prices of equity securities
19. Consumer Financial Protection Bureau As a result of the
Financial Reform Act of 2010, the Consumer Financial Protection Bureau was
established and housed within the Federal Reserve. Explain the role of this