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 8.4% coupon rate and pays the $84 coupon once per year. The third has a 10.4% coupon rate and pays the $104 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 8.4% coupon bond; (iii) the 10.4% coupon bond? (Round your answers to 2 decimal places.) X Answer is complete but not entirely correct. Zero Coupon 558.39 8.4% Coupon 1,000.00 10.4% Coupon $ 1,134.20 Current prices $ $ 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.) Answer is not complete. Zero Coupon $ 591.90 8.4% Coupon 10.4% 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.) Answer is complete and correct. Zero Coupon 8.4% Coupon 10.4% Coupon Pre-tax rate of return 6.00% 6.00% 6.00% d. If your tax bracket is 30% on ordinary income and 19.6% on capital gains income, what will be the after-tax rate of ret bond? (Round your answers to 2 decimal places.) Zero Coupon % 8.4% Coupon % 10.4% 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 beginning of next year. (Round your answers to 2 decimal places.) Answer is not complete. Zero Coupon 8.4% Coupon 10.4% Coupon $ 591.90 $ 1,013.60 $ 1,081.62 Price 1 year from now Pre-tax rate of return After-tax rate of return 16.44 X % 13.96 % 13.76 X % % 10.30 % 10.19% 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 8.4% coupon rate and pays the $84 coupon once per year. The third has a 10.4% coupon rate and pays the $104 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 8.4% coupon bond; (iii) the 10.4% coupon bond? (Round your answers to 2 decimal places.) X Answer is complete but not entirely correct. Zero Coupon 558.39 8.4% Coupon 1,000.00 10.4% Coupon $ 1,134.20 Current prices $ $ 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.) Answer is not complete. Zero Coupon $ 591.90 8.4% Coupon 10.4% 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.) Answer is complete and correct. Zero Coupon 8.4% Coupon 10.4% Coupon Pre-tax rate of return 6.00% 6.00% 6.00% d. If your tax bracket is 30% on ordinary income and 19.6% on capital gains income, what will be the after-tax rate of ret bond? (Round your answers to 2 decimal places.) Zero Coupon % 8.4% Coupon % 10.4% 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 beginning of next year. (Round your answers to 2 decimal places.) Answer is not complete. Zero Coupon 8.4% Coupon 10.4% Coupon $ 591.90 $ 1,013.60 $ 1,081.62 Price 1 year from now Pre-tax rate of return After-tax rate of return 16.44 X % 13.96 % 13.76 X % % 10.30 % 10.19%
