Answered step by step
Verified Expert Solution
Question
1 Approved Answer
I already answered some parts of the question, but I cannot figure out the blanks in part d & e. Problem 14-10 Assume you have
I already answered some parts of the question, but I cannot figure out the blanks in part d & e.
Problem 14-10 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 8.6% coupon rate and pays the $86 coupon once per year. The third has a 10.6% coupon rate and pays the $106 coupon once per year. a. If all three bonds are now priced to yield 5% to maturity, what are the prices of: (i) the zero-coupon bond; (ii) the 8.6% coupon bond; (iii) the 10.6% coupon bond? (Round your answers to 2 decimal places.) Zero Coupon 8.6% Coupon 10.6% Coupon 1,277.98$ Current prices 613.91 $ 1,432.42 b. If you expect their yields to maturity to be 5% at the beginning of next year, what will be the price of each bond? (Round your answers to 2 decimal places.) Zero Coupon 8.6% Coupon 10.6% Coupon 1,255.88 S $ 644.61$ 1,398.04 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 8.6% Coupon 10.6% Coupon 5.00% 5.00 % 5.00 % Pre-tax rate of return d. If your tax bracket is 30% on ordinary income and 19.4% on capital gains income, what will be the after-tax rate of return on each bond? (Round your answers to 2 decimal places.) Zero Coupon 8.6% Coupon 10.6% 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 4% at the beginning of next year. (Round your ansters to 2 d places.) Zero Coupon 8.6% Coupon 10.6% Coupon 1,490.73 702.59 Price 1 year from now $ 1,342.03 $ Pre-tax rate of return % After-tax rate of return % % Prev 5 of 18 Next
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started