Suppose your local government decided to tax the interest income on its own bonds as part of an effort to rectify serious budgetary woes. What would you expect to see happen to the yields on these bonds?

Suppose your marginal federal income tax rate is 36 percent. What is your aftertax return from holding a one-year corporate bond with a yield of 9 percent? What is your after-tax return from holding a one-year municipal bond with a yield of 5 percent? How would you decide which bond to hold?

In the wake of the financial crisis of 2007–2009, negative connotations often surrounded the term “mortgage-backed security.” What arguments could you make to convince someone that she may have benefi ted from the growth in securitization over the past 30 years?

Under what circumstances would purchasing a Treasury Inflation Protected Security (TIPS) from the U.S. government be virtually risk free?

Use the model of supply and demand for bonds to determine the impact on bond prices and yields of expectations that the real estate market is going to weaken.

Consider a U.S. Treasury bill with 270 days to maturity. If the annual yield is 3.8 percent, what is the price?

Explain how liquidity problems can be an important source of systemic risk in the financial system.

You are considering going to graduate school for a one-year master’s program. You have done some research and believe that the master’s degree will add $5,000 per year to your salary for the next 10 years of your working life, starting at the end of this year. From then on, after the next 10 years, it makes no difference. Completing the master’s program will cost you$35,000, which you would have to borrow at an interest rate of 6 percent. How would you decide if this investment in your education were profitable?

Given a choice of two investments, would you choose one that pays a total return of 30 percent over five years or one that pays 0.5 percent per month for five years?

You own a fixed-income asset with a duration of five years. If the level of interest rates, which is currently 8%, goes down by 10 basis points, how much do you expect the price of the asset to go up (in percentage terms)?

Find the duration of a 6% coupon bond making annual coupon payments if it has three years until maturity and a yield to maturity of 6%. What is the duration if the yield to maturity is 10%?

You buy an eight-year bond that has a 6% current yield and a 6% coupon (paid annually). In one year, promised yields to maturity have risen to 7%. What is your holding-period return?

What would be the likely effect on the yield to maturity of a bond resulting from:

a. An increase in the issuing firm’s times-interest-earned ratio?

b. An increase in the issuing firm’s debt-equity ratio?

c. An increase in the issuing firm’s quick ratio?

In a study published in the American Journal of Psychiatry, researchers wanted to measure the effect of alcohol on the hippocampal region, the portion of the brain responsible for long -term memory storage, in adolescents. The researchers randomly selected 12 adolescents with alcohol use disorders to determine whether the hippocampal volumes in the alcoholic adolescents were less than the normal volume of 9.02 cubic centimeters $\left(\mathrm{cm}^{3}\right)$. An analysis of the sample of data revealed that the hippocampal volume is approximately normal with $\bar{x}=8.10 \mathrm{cm}^{3}$ and $s=0.7 \mathrm{cm}^{3}$. Conduct the appropriate test in the $\alpha$=0.01 level of significance.