Question

1. Ye Yuan is in retirement and is considering investing in one of the following two money market securities: A US Treasury Bill offering 6.71% A Massachusetts Municipal bond offering 4.78% Ye pays Federal tax at the rate of 28% and tax to the state of Massachusetts (his state residency) of 4%. Ye estimates that the US Treasury Bill has zero risk of default, and that the Massachusetts municipal bond has a 1% chance of default. Because the quoted yield is before tax and credit risk adjustments, Ye is interested in determining which of these two bonds is best. How much more (or less) in yield does the Treasury Bill offer after adjusting for tax and credit risk? If the believe that the Treasury Bill is best, then enter the differential as a positive number. If you believe the municipal is best, then enter the differential as a negative number.

Difference in yield =

2. Ye Yuan is in retirement and is considering investing in one of the following two money market securities: A Bank CD offering a quoted yield of 7.15% A Massachusetts Municipal bond offering a quoted yield of 4.91% Ye pays federal tax at the rate of 32% and tax to the state of Massachusetts (his state residency) of 7%. Ye estimates that the Massachusetts municipal bond has a 1% chance of default, and that the bank CD has a 2% chance of default. Because the quoted yield is before tax and credit risk adjustments, Ye is interested in determining which of these two bonds is best. How much more (or less) in yield does the Bank CD offer after adjusting for tax and credit risk? If the believe that the CD is best, then enter the differential as a positive number. If you believe the municipal is best, then enter the differential as a negative number.

Difference in yield =

3. Triumph Corporation extends credit to many of its customers, and sets the term of these credits at: 2/10; net/60 Triumph has noted that many of its credit customers choose not to take the discount, a concern of the company. Which of the following 6 choices would, by itself, result in more customers taking the discount? There may be more than one correct answer. To receive credit you must check all choices that apply - that is - check all choices that, by itself, would result in more customers taking the discount.

a. net/50 instead of net/60

b. net/70 instead of net/60

c. 2/5 instead of 2/10

d. 1/10 instead of 2/10

e. 2/15 instead of 2/10

f. 3/10 instead of 2/10

Answer 1

1	Requirement
	Municipal Bond offer tax free Interest.
	Therefore accounting for credit risk the yield on muncipal bond
	Yield *(1-Default Chance)
	(4.78%*(1-1%)
	4.73%
	After tax Yield on US Treasury
	Yield *(1-Tax rate)
	6.71%*(1-28%)
	4.83%
	Hence the US treasury offers a higher rate
	Difference
	(4.83%-4.73%)
	0.10%
2	Requirement
	Particulars	Sr No	Bank CD	Massachusetts Municipal Bond
	Yield%	a	7.15	4.91
	Tax%	b	32	7
	Chance of Default%	c	2	1
	Yield after tax%	d=a*(1-b)	4.86	4.57
	Yield after tax	e=d*(1-c)	4.76	4.52
	adj to changes
	of default%
	Hence Bank
	CD is best
	Excess return by Bank
	CD%		0.24
3	Requirement
		Option	Acceptance	Comments
	1	Net/50 instead of 60	No	Since the repayment days are
				decreasing it will not provide
				any benefit to the customer
	2	2/5 Instead of 2/10	No	the days to avail the discount is
				decreasing so not favorable
				for the customer
	3	1/10 instead of 2/10	No	The discount have decreased
				and the period of repayment is same
				hence will not be profitable
	4	net/70 instead of net/60	Yes	The repayment period have
				increased hence it will not be favorable
				for the customer if the discount is
				not availed
	5	2/15 instead of 2/10	yes	the period of credit is increasing
				so it will be favourable for the
				customer to avail .
	6	3/10 instead of 2/10	Yes	The discount have increased
				for the same number of repayment
				period so it will be profitable for
				the customer