A. Joe wants to invest in Nebraska Municipal 6% GOB that are rated AA. Joe's tax rate is usually between 28% . GE plans to sell AA rated 8% coupon bonds. Compute Joe's after-tax income, if Joe invests in GE bond.
B. Suppose that Joe's tax rate is 40%. What is the coupon rate of corporate bonds which yields exactly 6% in after-tax income, assuming that both bonds are high grades with no default risk.
The current one year interest rate is 0.0430. Economists at Federal Reserve System forecast that one year interest rates expected at t=1,2,3,4 will be following for the next five years
one year rate
t Expected at t liquidity premium
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0 0.0430 0.0000
1 0.0513 0.0020
2 0.0535 0.0020
3 0.0635 0.0025
4 0.0715 0.0030
A. Use the exact expectation theory, forecast the following
The interest rate on a two year loan
The interest rate on a three year loan
The interest rate on a four year loan
The interest rate on a five year loan
B. Suppose that you believe in the liquidity premium theory of Mishikin, what will be the revised interest rates on a two year loan, on a three year loan, on a four year loan, and on a five year loan
C. Suppose that you use the average rather than the geometric mean. What are the rates on the following:
Two year loan
Three year loan
Four year loan
Five year loan