1.InterpretthefollowingstatementmadebyWallStreetanalystsandportfoliomanagers:"Althoughyieldsamongbondsarerelated,today'srumorsofataxcutcausedanincreaseintheyieldonmunicipalbonds,whiletheyieldoncorporatebondsdeclined." (5 points)

2.Compare and contrast the expectations theory and the liquidity premium theory of the term structure of interest rates. (10 points)

3. Suppose today's 10-year rate is 9 percent. Today's 4-year rate is 7 percent. Estimate the 6-year forward rate in four years if the 10-year ratehas a .3 percent liquidity premium. (6 points)

4, Consider a 30-year corporate bond paying 8 percent semi-annual coupon. The current yield to maturity is 10 percent. Find the approximate bonds modified duration by using changes in the interest rate up and down by 5 basis points. (10 points)

5. What is a monetary policy target? Explain why it is difficult for the Fed to target both the interest rate and the money supply simultaneously. (7 points)