1. Assume that U.S. and Argentine investors require a real return of 2 percent. If the U.S. nominal interest rate is 5 percent, and Argentina's nominral interest rate is 7 percent, then according to the IFE, the Argentine inflation rate is expected to be about ____ the U.S. inflation rate, and the Argentine peso is expected to ____.
a. 2 percentage points above; depreciate by about 2 percent
b. 3 percentage points below; appreciate by about 3 percent
c. 3 percentage points below; depreciate by about 3 percent
d. 3 percentage points above; depreciate by about 3 percent
e. 2 percentage points below; appreciate by about 2 percent
2. You have the chance to buy either one of two bonds. The first is a tax-free municipal with a coupon yield of 6.5%. The second is a corporate bond with a yield of 8.5%. Both bonds are rated AA. Your tax rate is 28%. Which would you choose? (Show all work.)