1. Interpret the following statement made by Wall Street analysts and portfolio managers: "Although yields among bonds are related, today's rumors of a tax cut caused an increase in the yield on municipal bonds, while the yield on corporate bonds declined."

2. Compare and contrast the expectations theory and the liquidity premium theory of the term structure of interest rates.

3. Suppose today's 10-year rate is 9 percent. Today's 4-year rate is 7 percent. Estimate the 6-year forward rate in four years if the 10-year rate has a .3 percent liquidity premium.

4. Consider a 30-year corporate bond paying 8 percent semi-annual coupon. The current yield to maturity is 10 percent. Find the approximate bond's modified duration by using changes in the interest rate up and down by 5 basis points.

5. What is a monetary policy target? Explain why it is difficult for the Fed to target both the interest rate and the money supply simultaneously.