Interpreting the Structure of Interest Rates a. Explaining Yield Differentials Using the most recent issue of any source, review the yields for the following securities

type	maturity	yield
treasury	10-year	2.35%
corporate: high quality	10-year	3.28%
corporate: medium quality	10-year	3.02%
municipal (tax exempt)	10-year	2.02%

If credit (default) risk is the only reason for the yield differentials, then what is the default risk premium on the corporate high-quality bonds?

On the medium-quality bonds?

During a recent recession, high-quality corporate bonds offered a yield of 0.8 percent above Treasury bonds while medium-quality bonds offered a yield of about 3.1 percent above Treasury bonds. How do these yield differentials compare to the differentials today?

Explain the reason for any change Using the information in the previous table, complete the table below. In Column 2, indicate the before-tax yield necessary to achieve the existing after-tax yield of tax-exempt bonds. In Column 3, answer this question: If the tax-exempt bonds have the same risk and other features as high- quality corporate bonds, which type of bond is preferable for investors in each tax bracket?

Marginal Tax Bracket of Investors	Equivalent before-tax yield	preferred bond
10%
15%
20%
28%
34%

c. Review the yield curve of any recent issue to determine the approximate yield for the following maturities:

term to maturity	annualized yield
1 year
2 years
3 years

assuming that the differences in these yields are due solely to intrest rate expectations, determine the one-year forward as of one year from now and the one-year forward rate as of two years from now.