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 6.0% coupon rate and pays the $60 coupon once per year. The third has a 7.0% coupon rate and pays the $70 coupon once per year. a. If all three bonds are now priced to yield 6% to maturity, what are the prices of: (i) the zero-coupon bond; (ii) the 6.0% coupon bond; (iii) the 7.0% coupon bond? (Round your answers to 2 decimal places.) Zero Coupon 6% Coupon 7% Coupon Current prices $ 558.39 b. If you expect their yields to maturity to be 6% at the beginning of next year, what will be the price of each bond? (Round your answers to 2 decimal places.) Zero Coupon 6% Coupon 7% Coupon Price 1 year from now c. What is your before-tax holding-period return on each bond? (Round your answers to 2 decimal places.) Zero Coupon 6% Coupon 7% Coupon Pre-tax rate of return d. If your tax bracket is 30% on ordinary income and 23% on capital gains income, what will be the after-tax rate of return on each bond? (Round your answers to 2 decimal places.) 6% Coupon Zero Coupon % 7% Coupon % After-tax rate of return e. Recalculate your answers to (b)-(d) under the assumption that you expect the yields to maturity on each bond to be 5% at the beginning of next year. (Round your answers to 2 decimal places.) Zero Coupon 6% Coupon 7% Coupon Price 1 year from now Pre-tax rate of return After-tax rate of return % % % % % % 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 6.0% coupon rate and pays the $60 coupon once per year. The third has a 7.0% coupon rate and pays the $70 coupon once per year. a. If all three bonds are now priced to yield 6% to maturity, what are the prices of: (i) the zero-coupon bond; (ii) the 6.0% coupon bond; (iii) the 7.0% coupon bond? (Round your answers to 2 decimal places.) Zero Coupon 6% Coupon 7% Coupon Current prices $ 558.39 b. If you expect their yields to maturity to be 6% at the beginning of next year, what will be the price of each bond? (Round your answers to 2 decimal places.) Zero Coupon 6% Coupon 7% Coupon Price 1 year from now c. What is your before-tax holding-period return on each bond? (Round your answers to 2 decimal places.) Zero Coupon 6% Coupon 7% Coupon Pre-tax rate of return d. If your tax bracket is 30% on ordinary income and 23% on capital gains income, what will be the after-tax rate of return on each bond? (Round your answers to 2 decimal places.) 6% Coupon Zero Coupon % 7% Coupon % After-tax rate of return e. Recalculate your answers to (b)-(d) under the assumption that you expect the yields to maturity on each bond to be 5% at the beginning of next year. (Round your answers to 2 decimal places.) Zero Coupon 6% Coupon 7% Coupon Price 1 year from now Pre-tax rate of return After-tax rate of return % % % % % %
