4. The following yields were reported on August 4, 2014, for U.S.

Treasury securities, corporate bonds, and tax-exempt bonds (i.e., municipal bonds):

a. Why is the yield on a tax-exempt security less than the yield on a Treasury security of the same maturity and credit rating?

b. Why is the yield on a tax-exempt security less than the yield on a corporate security of the same maturity and credit rating?

c. What appears to be the relationship between yield and maturity for corporate bonds?

d. For an investor in the 40% marginal tax bracket, compare the yield on the two-year AA-rated corporate bond and the tax-exempt bond on an equivalent-taxable yield basis.

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Issuer Rating 2-Year 5-Year 10-Year Treasury Corporate Corporate - 0.52 1.75 2.56 AAA - 1.87 2.92 AA 0.52 2.02 3.26 Corporate A 0.65 2.12 3.42 Tax exempt AAA 0.42 1.15 2.15 Tax exempt AA 0.43 1.30 2.44 Tax exempt A 0.63 1.47 2.42