14. Ernie Griffin just purchased a five-year zero coupon corporate bond for $680.60 and plans to hold it until maturity. Assume Ernie has a marginal tax rate of 25%.

a. Calculate Ernie’s after-tax cash flows from the bond for the first two years.

Assume annual compounding.

b. Describe in words the difference in cash flows between owning Ernie’s bond and a five-year U.S. savings bond for the same amount.

(Hint: See the Insights box on page 284 for this problem.)

Problems 15 through 17 refer to the bonds of The Apollo Corporation, all of which have a call feature. The call feature allows Apollo to pay off bonds anytime after the first 15 years, but requires that bondholders be compensated with an extra year’s interest at the coupon rate if such a payoff is exercised.