Assume you are the CIO of a bond fund. You trade different types of fixed-income securities and have a 1-year investment horizon. You 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% coupon rate and pays the $80 coupon once per year and is issued by the Curators of a University. The third has a 10% coupon rate and pays the $100 coupon once per year and issued by the state.

A. If all three bonds are now priced to yield 8% to maturity, what are the prices of (i) the zero-coupon bond; (ii) the 8% coupon bond; (iii) the 10% coupon bond?

B. If you expect their yields to maturity to be 8% at the beginning of next year, what will be the price of each bond?

C. What is your before-tax holding-period return on each bond?

D. In the real world, you have to pay taxes on financial gains. The IRS taxes coupons at 30%, while capital gains at 20%. However, if a capital gain comes from a zero-coupon bond, it's treated as coupons. What will be the after-tax rate of return on each bond?