1. A tax-exempt municipal bond offers a yield of 5.75% A taxable corporate bond offers a nominal (pre-tax) yield of 8.00%.

a.) If an investor has a tax rate of 20%, what would be their after-tax yield on the corporate bond, and which bond (municipal or corporate) would they prefer?

b.) If an investor has a tax rate of 40%, what would be their after-tax yield on the corporate bond, and which bond (municipal or corporate would they prefer?

c.) At what tax rate would an investor be indifferent between the municipal bond and the corporate bond?

2. Assume the pure expectations theory of the term structure of interest rates (yield curve).

a.) The two-year rate is 2.75% (annually). The one-year rate is 1.00%. What is the one-year forward rate one year from now?

b.) The three-year rate is 4.25% (annually). The two-year rate is 2.75% (annually). What is the one-year forward rate two years from now?