Assume you have a 1-year investment horizon and are trying to choose among three

Question

Assume you have a 1-year investment horizon and are trying to choose among three bonds. All have the same degree of default risk and mature in 10 years. The first is a zero-coupon bond that pays $1,000 at maturity. The second has an 8.8% coupon rate and pays the $88 coupon once per year. The third has a 10.8% coupon rate and pays the $108 coupon once per year. a. If all three bonds are now priced to yield 9% to maturity. What are their prices? (Round your answers to 2 decimal places. Omit the "$" sign in your response.) b. If you expect their yields to maturity to be 9% at the beginning of next year, what will their prices be then? What is your before-tax holding-period return on each bond? If your tax bracket is 30% on ordinary income and 20% on capital gains income, what will your aftertax rate of return be on each? (Round your answers to 2 decimal places. Omit the "$ & % " signs in your response.) c. If you expect their yields to maturity to be 8% at the beginning of next year, what will their prices be then? What is your before-tax holding-period return on each bond? If your tax bracket is 30% on ordinary income and 20% on capital gains income, what will your aftertax rate of return be on each? (Round your answers to 2 decimal places. Omit the "$ & %" signs in your response.)

Explanation / Answer

Answer:a

Answer:b

Answer:c

Particulars Zero coupon 8.8% coupon 10.8% coupon Current prices 422.41 987.16 1115.52

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