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