1. Suppose XYZ is priced at $125 a share. The 150 call has six months to expiration and is quoted at $.05. Why do you suppose investors would be willing to purchase a call that is so far out of the money?
2. Explain whether the following statement is true or false: “Only weak companies issue debentures”. Why there is a yield spread between a corporate bond and a Treasury bond?
3. 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?