Question

What should I buy if the Fed is raising rates due to a strong economy and the government is cutting taxes?

1. Treasury Bonds
2. Medium term higher yield corporate bonds
3. Longer term Municipal bonds
4. 20 yr below investment grade bond

3. T/F General obligation muni bonds are backed by the full faith and credit of the issuing state

4. T/F If I have a an investment horizon of 7 years, I can immunize my interest rate risk in my bond portfolio by targeting a duration of 7

Answer 1

SOLUTION:-

Treasury bond (T-Bond)

A Treasury bond (T-Bond) is a marketable, fixed-interest U.S. government debt security with a maturity of more than 10 years. Treasury bonds make interest payments semi-annually, and the income received is only taxed at the federal level. Treasury bonds are known in the market as primarily risk-free; they are issued by the U.S. government with very little risk of default.

'Intermediate/Medium-Term Debt'

A type of fixed income security with a maturity, or date of principal repayment that is set to occur in the next 3-10 years. Bonds and other fixed income products tend to be classified by maturity date, as it is the most important variable in the yield calculations. In a standard (or positive) yield curve environment, intermediate-term bonds pay a higher yield for a given credit quality than short-term bonds, but a lower yield compared to long-term (10+ years) bonds.

Medium term higher yield corporate bonds
Short-term bonds mature in one to three years, while long-term bonds won't mature for more than a decade. Generally, the interest on municipal bonds is exempt from federal income tax. The interest may also be exempt from state and local taxes if you reside in the state where the bond is issued.

'Investment Grade'

An investment grade is a rating that indicates that a municipal or corporate bond has a relatively low risk of default. Bond rating firms, such as Standard & Poor's and Moody's, use different designations consisting of upper- and lower-case letters 'A' and 'B' to identify a bond's credit quality rating. 'AAA' and 'AA' (high credit quality) and 'A' and 'BBB' (medium credit quality) are considered investment grade. Credit ratings for bonds below these designations ('BB', 'B', 'CCC', etc.) are considered low credit quality, and are commonly referred to as "junk bonds".

Conclusion:- As per my opinion you should buy Long term municipal bonds because the interest rates are raise due to strong economy adn the goverment also reducing rates hence Municipal bonds are th safest option for invetment.