1. You need to choose between investing in a one-year municipal bond with a 7 percent yield and a one-year corporate bond with an 11 percent yield. If your marginal federal income tax rate is 30 percent and no other differences exist between these two securities, which one would you invest in?
2. A corporation is planning to sell its 90-day commercial paper to investors offering a 9 percent yield. If the three-month T-bill’s annualized rate is 5 percent, the liquidity premium is estimated to be 0.8 percent and there is a 0.4 percent tax adjustment, what is the appropriate default risk premium?