Question
Use the following interest rates and inflation rate data to answer the following questions below: 90-day Treasury bills 8.36% 180-day Treasury bills 8.48% 2-year Treasury
Use the following interest rates and inflation rate data to answer the following questions below:
90-day | Treasury bills | 8.36% |
180-day | Treasury bills | 8.48% |
2-year | Treasury bills | 9.10 |
3-year | Treasury bills | 9.25 |
90-day | Commercial paper | 9.15 |
3-year | Corporate bonds | 10.10 |
3-year | Municipal bonds | 7.07 |
Expected 2-year inflation rate | 3.5 |
a. According to the fisher effect, what is the expected real rate of return on the 2-year Treasury security?
b. What should be the one-year forward rate on Treasury securities be two years from now?
c. At what tax rate would an investor be indifferent between holding the 3-year municipal or 3-year corporate bond?
d. What is the default risk premium on 3-year AA-rated corporate bonds?
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