Question

1. For the next 4 questions suppose the following data on yields from WSJ holds:

3-month T-Bill	5.0%
30-year T-Bond	7.2%
30-year AAA Corporate	8.6%
30-year Municipal	6.02%

2. 
   What is the real risk free rate for 3-month if the inflation for 3 months is estimated as 3.0%?

		1.8%
		2.0%
		2.2%
		2.4%
		2.6%

1. What is the maturity risk premium on 30-year Treasury bonds? Assume the expected inflation for 3-month T-Bills and 30-year T-Bonds are the same.

		0.8%
		1.0%
		1.2%
		1.8%
		2.2%

1. What is the default risk premium on 30-year AAA corporate bonds? Assume there exist liquid markets for AAA corporate bonds.

		0.8%
		1.0%
		1.2%
		1.4%
		1.5%

1. Assume the same risk for 30-year AAA Corporate bonds and 30-year Municipal Bonds. If you are indifferent between the two bonds what is your implied marginal tax rate?

		25%
		28%
		29%
		30%
		32%

Answer 1

1-	real risk free rate	3 month t-bill rate - inflation rate	5%-3%	2%
2-	Maturity risk premium	Yield on 30 Years treasury bond-real risk free rate-inflation rate	7.2%-2%-3%	2.2%
3-	default risk premium	Yield on 30 Years AAA rated bond-real risk free rate-inflation rate-maturity risk premium	8.6%-2%-3%-2.2%	1.4%
4-	Implied marginal tax rate	increased yield/Yield on 30 years AAA rated corporate bonds	(8.6-6.02)/8.6	30%