1. If a six- month Treasury bill is purchased for $ 0.9675 on a dollar ( i. e., $ 96,750 for a $ 100,000 bill), what is the discount yield, the annual rate of interest, and the compound rate? What will these yields be if the discount price falls to $ 0.94 on a dollar ( i. e., $ 94,000 for a $ 100,000 bill)?
2. An investor is in the 28 percent income tax bracket and can earn 3.3 percent on a non-taxable bond. What is the comparable yield on a taxable bond? If this same investor can earn 5.9 percent on a taxable bond, what must be the yield on a nontaxable bond so that the after- tax yields are equal?
3. An investor in the 35 percent tax bracket may purchase a corporate bond that is rated double B and is traded on the New York Stock Exchange ( the bond division). This bond yields 9.0 percent. The investor may also buy a double- B- rated municipal bond with a 5.85 percent yield. Why may the corporate bond be preferred? ( Assume that the terms of the bonds are the same.)
4. You are in the 28 percent federal income tax bracket. A corporate bond offers you 6.8 percent while a tax- exempt bond with the same credit rating and term to maturity offers 4.1 percent. On the basis of taxation, which bond should be preferred? Explain.
5. A six- month $ 10,000 Treasury bill is selling for $ 9,844. What is the annual yield -according to the discount method? Does this yield understate or overstate the true ¬annual compound yield? Explain.
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