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Analyzing risk

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Suppose the following data on yields from holds:
3-month T-Bill 5.0%
30-year T-Bond 7.2%
30-year AAA Corporate 8.6%
30-year Municipal 6.02%

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?

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

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

4. 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.

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Solution Summary

The solution explains the calculation of default risk premium, real risk free rate and maturity risk premium

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Suppose the following data on yields from holds:
3-month T-Bill 5.0%
30-year T-Bond 7.2%
30-year AAA Corporate 8.6%
30-year Municipal 6.02%

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?

The Corporate bond is taxed and the Municipal bond ...

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