4. You have the opportunity to buy a zero-coupon municipal bond that will pay you $1000 in three years. The current market yield to maturity on this bond is 4.7%. What price ($) should you pay for the bond today? What will the bond be worth a year from today assuming the market yield to maturity remains at 4.7%? What is your one-year holding period return over the year that you hold the zero-coupon municipal bond?

Price today = $

Price year from today = $

HPR =

Given that you are in the 26 percent combined federal and state tax rate, what is your tax-equivalent yield on the bond? In other words, what rate would a zero coupon taxable bond need to yield before taxes if it were to have a 4.7 percent after-tax yield?

Tax equivalent Yield = _____________%