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FIN350- Questions and Applications

Chapter 3: Questions and Applications 4 and 9; Problems 2, 4, and 5

4. Tax Effects on Yields Do investors in high tax brackets or those in low tax brackets benefit more from tax-exempt securities? Why? At a given point in time, which offers a higher before-tax yield: municipal bonds or corporate bonds? Why? Which has the higher after-tax yield? If taxes did not exist, would Treasury bonds offer a higher or lower yield than municipal bonds with the same maturity? Why?

9. Impact of Liquidity Premium on Forward Rate Explain how consideration of a liquidity premium affects the estimate of a forward interest rate

2. Forward Rate Assume that, as of today, the annualized interest rate on a three-year security is 10 percent and the annualized interest rate on a two-year security is 7 percent. Use only this information to esti- mate the one-year forward rate two years from now.

4. After-Tax Yield You need to choose between investing in a one-year municipal bond with a 7 percent yield and a one-year corporate bond with an 11 percent yield. If your marginal federal income tax rate is 30 percent and no other differences exist between these two securities, which one would you invest in?

5. Deriving Current Interest Rates Assume that interest rates for one-year securities are expected to be 2 percent today, 4 percent one year from now, and 6 percent two years from now. Using only pure expecta- tions theory, what are the current interest rates on two- year and three-year securities?

Chapter 4: Questions and Applications 1, 10, 15, 16, and 19

1. The Fed Briefly describe the origin of the Federal Reserve System. Describe the functions of the Fed district bank.

10. Effect on Money Supply Why do the Fed’s open market operations have a different effect on the money supply than do transactions between two depository institutions?

15. The Fed’s Impact on Home Purchases Explain how the Fed influences the monthly mortgage payments on homes. How might the Fed indirectly influence the total demand for home by consumers?

16. The Fed’s Impact on Security Prices Explain how the Fed’s monetary policy may indirectly affect the prices of equity securities

19. Consumer Financial Protection Bureau As a result of the Financial Reform Act of 2010, the Consumer Financial Protection Bureau was established and housed within the Federal Reserve. Explain the role of this bureau.

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