Chapter_5_On_the_Board_Questions[1] - On the Board...

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On the Board Questions Chapter 5 1. Assume corporate and treasury bonds have the same risk and liquidity. Market conditions change such that the probability of bankruptcy increases and liquidity falls for corporate bonds. Show a graph of the demand and supply curves for the corporate bond market and the Treasury bond market. Plot the shifts in demand. What happens to the corporate and Treasury bond interest rates and the size of the new spread? 2. One-year interest rate over the next three years is expected to be 1%, 3%, 5%. The liquidity premium for one- to three-year bonds: 0%, 0.25%, 0.5%. Find the interest rate on the three year bond. 3. The one year interest rate today is 5% on a Tbond. The two year interest is 7% on the Tbond. What is the market predicting about the interest rate on a one year bond one year from now solely based on the expectations theory? 4. Debt issued by Southeastern Corporation currently yields 11%. A municipal bond of equal risk currently yields 8%. Your marginal tax bracket is 30%. Which is the better buy?
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This note was uploaded on 09/07/2011 for the course FIN 353 taught by Professor Cobus during the Spring '08 term at S.F. State.

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Chapter_5_On_the_Board_Questions[1] - On the Board...

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