1. You purchase a Treasury inflation-protected note with an original principal amount of $1,000,000 and a 2.8 percent annual coupon (paid semiannually). What will the first coupon payment be if the semiannual inflation over the first six months is 1.2%?
2. The yield on a three-year Treasury note is 4.5% and the yield on a three-year TIPS is 2.4%. What is the market’s estimate of the annual inflation rate over the next three years?
3. An investor can invest either in 7% general obligation bond or in 11% mortgage backed security. Which asset is more attractive for investor if she is in the 34% federal tax bracket? Why?
4. If average corporate bond and tax-exempt municipal bond rates were 8.33% and 6.25% respectively, at what marginal tax rate would an investor be indifferent between the two? Why?