3. You are considering purchasing one of two bonds, a municipal bond or a corporate bond of comparable risk. Both bonds are selling at par, and their yields are 6% and 4%.

a. If you are in the 20% marginal tax bracket, which bond would you prefer? Justify your choice by discussing before- and after-tax yields.

b. What marginal tax rate would make you indifferent between the two choices?

4. Determine the security in each case that would most likely have thehigher price. In each case, clearly and fully explain your answers.

a. Two U.S. Treasury bonds with the same remaining maturity. One has a 3% coupon and the other a 4% coupon, and their required return is 3%.

b. Two call options on the same stock. The options have the same maturity, but one has an exercise price of $35 and the other has an exercise price of $40.

c. Two put options on two different stocks. The stocks currently sell for $50 and $51. The puts have the same maturity and exercise prices.

d. In answering part c, do you need to make any assumptions about the two underlying stocks?

5. You see the bid and ask prices for ABC Corp are 55.25 and 55.50, respectively.

a. At what price could you purchase the stock?

b. At what price could you sell (what price would a dealer pay you) the stock?

c. You submit a limit order to sell at $55.62. What will happen?

d. You submit a limit order to buy at $55.37. What will happen?

6. The current price of Telecom RSP is $50 and you want to purchase $10,000 its stock on 50% margin. The broker call loan rate is 8%.

a. Assuming Telecom pays no dividends, what will be your return on investment, if Telecom goes up 10%?

b. What is the minimum price Telecom can hit before you receive a margin call?

7. The open-end fund has a NAV of $10.70 per share and a front-end load of 6%. What is its offering price?

8. A mutual fund has $450 million in assets and liabilities of $10 million.

a. If the fund has 44 million shares outstanding, what is its NAV?

b. If an investor redeems 1,000,000 shares, what happens to the value of the fund’s portfolio, to the number of shares outstanding, and to its NAV?