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 zero coupon bond that pays $1,000 at maturity. The second has an 8% coupon rate and pays the $80 coupon once per year. The third has a 10% coupon rate and pays $100 coupon once per year.

a) If all three bonds are now priced at yield 8% to maturity. What are the prices of: (i) the zero coupon bond: (i) the 8% coupon bond: (ii) 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) If your tax bracket is 30% on ordinary income and 20% on capital gains income, what will be the after-tax rate of return on each bond?

e) Recalculate your answers to to parts (b)-(d) under the assumption that you expect the yields to maturity on each bond to be 7% at the beginning of next year.