1.) Suppose you have two investment options: a corporate bond with a 7% annual coupon payment or a municipal bond with a 6% annual coupon payment. If your tax rate was 25% which bond would you invest in? Show your work.
2.) There have been a few times in U.S. history when the return on a short-term bond has been lower than the return on a long-term bond (the yield curve is downward sloping). Explain why this occurs.
3.) The following table shows the estimated yearly T-bill rate for the next several years. If you purchased a 4-year government bond what rate would you expect to receive? A 2-year government bond? Show your work.
|
Year
|
1-Year Rate
|
Liquidity Premium
|
|
2017
|
2%
|
0%
|
|
2018
|
2.3%
|
.25%
|
|
2019
|
2.7%
|
.25%
|
|
2020
|
3%
|
.5%
|
4.) Suppose you read in the Wall Street Journal that the price of GE is expected to increase in the future. Should you invest in GE (will you be able to achieve an abnormal profit)? Why or Why not?
5.) We talked about several anomalies in class (momentum, January, weekend, P/E, B/M, earnings surprise, small firm, neglected firm). Use the internet to search for another anomaly that conflicts with EMH. Briefly, explain what the anomaly is and how you would receive abnormal returns. Have any explanations been found for why the anomaly exists or does it weaken the efficient market hypothesis?
6.) The news has recently suggested that stock prices are much higher than they should be given future growth estimates. Do you think the news is correct and many stocks are currently overpriced or are they accurately priced? Provide at least two reasons to support your answer. How does your answer relate to the efficient market hypothesis?