5. Suppose 1-year Treasury bills currently yield 7.00% and the current and future inflation rate is expected to be constant at 3.2% per year. What is the real risk- free rate of return, r"? a. 4.19% b. 3.80% c. 4.40% d. 4.62% 6. Suppose the interest rate on a 1-year T-bill is 5.0% and on a 2-year T-bill is 6.0%. Assuming the pure expectations theory is correct (and MRP-0), what is the market's forecast for 1-year rates 1 year from now? a. 7.36% b. 7.01% c. 8.16% d. 8.54% e. 9.04% 7. An advantage of investing in municipal bonds is: a. Typically they have a higher yield than corporate bonds. b. They are less risky then treasury bonds. c. Income earned is exempt from federal taxes; and from state taxes if the holder resides in the issuing state. d. They are exempt from foreign taxes. 8. Which of the following events would make it more likely that a company would call its outstanding callable bonds? a. The company's bonds are downgraded. b. Market interest rates rise sharply. c. Market interest rates decline sharply. d. The company's financial situation deteriorates significantly. e. Inflation increases significantly. A corporate bond with an AA rating and 10 years to maturity is: a. An investment grade bond. b. More risky than a 10 year Treasury bond. c. Less risky than a BBB corporate bond with 10 years to maturity. d. All of the above. 9