Use the information on bond yields for September 2016 and September 2017 to answer the following questions. Show Working

1-YearBond Yields (%) Sept 2016 and 2017

20162017

US Treasury 0.68% 1.36%

Corporate AAA 0.73% 1.49%

Corporate AA 1.22% 1.62%

Corporate A 1.42% 1.82%

Corporate BBB 2.15% 1.85%

Municipal AAA 0.75% 1.09%

Municipal AA 0.88% 1.23%

Municipal A 0.99% 1.28%

US Treasury Yield Curve

1 Mo3 Mo6 Mo1 Yr2 Yr3 Yr4 Yr5 Yr10 Yr20 Yr30 Yr

9/17 0.96 1.06 1.201.311.471.621.922.16 2.33 2.63 2.86

9/160.160.26 0.42 0.580.750.861.121.39 1.56 1.96 2.28

5-year TIPS

9/170.16%

9/16-0.17%

A. Using 5-year bond yields, calculate the expected rate of inflation in September 2016 and September 2017:

2017:

2016:

B. Calculate the probability of default on a corporate BBB bond in September 2016 and September 2017:

2017:

2016:

C. Assuming a 35% tax bracket, calculate the tax equivalent yield for a Municipal AAA bond in September 2017.

2. Referring to the Question 1 data, use the yield curve information for September 2016 and September 2017 to answer the following questions. YOU MUST SHOW YOUR WORK

A. Assuming the expectations theory is correct and using the 2017 information, calculate the expected interest rate on a 1-year bond in year 5 (four years from now )

B. Using your answer for the expected inflation rate for 2017 in Question No. 1, what is the implied real interest rate.