1. You own one bond each that has the following ratings: A, BB, BBB, B, CCC, AAA.

a. How many investment grade bonds do you own?

b. How many speculative grade bonds do you own?

2.You are given the following default risk structure of interest rates:

Rating:AAA AA A BBB BB B CCC

YTM: 3.17% 3.25% 3.50% 4.08% 5.31% 5.88% 7.22%

DRP: _______ ________ _________ ________ _________ ________ _____

a. If the comparable risk-free rate = 3.00%, what is the default risk premium (DRP) for each rating?

b. What is the spread, in basis points, between investment grade and speculative grade yields?

3. You own a taxable bond that has YTM = 4%. If your tax rate is 20%, what is your after-tax return?

4. What is the taxable-equivalent yield of a municipal bond that has YTM = 6%, if the tax rate = 28%?

5. You are trying to decide whether to buy the ABC corporate bond that yields 6.5%, or the Bucksville municipal bond that yields 4.60%.

a. If you are in a 15% marginal income tax bracket, what is the after-tax yield on the ABC bond?

Which bond is the better investment, assuming all else equal?

b. If you are in a 35% marginal income tax bracket, what is the after-tax yield on the ABC bond?

Which bond is the better investment, all else equal?

c. What do your answers in parts a and b say about the potential market for municipal bonds? What type

of investor is most interested in these investments?

6. What is the difference between liquidity and marketability?

7. Define and give an example of each of the following tax treatments of income:

a.Fully taxable

b.Tax-deferred

c.Tax-advantaged

d.Tax-free