Question

a)Explain the concept of behavioral finance. How does relate to market efficiency?

b)Bonds are issued by the Treasury, corporations, and municipalities. What are some common characteristics of these bonds and what are their differences? (risk, taxes, purpose for issue, how they are repaid)

**Use websites and no copy paste please

Answer 1

a) Behavioral finance combines the psychological and behavioral theory with the economics and finance theory in order to understand the investor's financial decision making process. If investor overcomes from their behaviour issues like Conservatism, Overconfidence, Biased Self-attribution, Attention Bias, etc. then the market will become efficient. But it is an imaginary situation because human beings are not machine and they makes mistake.

b)

	Treasury	Corporations	Municipalities
Issuer	Issued by national governments.	Issued by the corporations	Issued by state or local governments or by government agencies (also known as "munis")
Tax	It is exempt from taxation at the state and local level but is fully taxable at the federal level.	Taxable	Not all municipal bonds offer income exempt from both federal and state taxes. Some municipal bonds are taxable at the federal level, but still offer a state and often local tax exemption on interest paid to residents of the state of issuance.
Risk	Low risk because the government is the guarantor of the bonds.	Depends upon the company performance (Mostly higher than Treasury and Municipalities bonds)	Municipal bonds considered as extremely safe investments, since they are often backed by infrastructure revenue or income tax.
Purpose for issue	To finance the government spending activities.	To finance the working capital needs, merger/acquisition, etc.	To build schools, highways, hospitals, and many other projects for the public good
How they are repaid	Can be repaid through additional borrowing, printing more notes and taxes.	Through profits, sale of assets and additional borrowing.	Through infrastructure revenue or income tax and additional borrowing.