For comparing the zero- and coupon bonds, assume you start with $1,000 of money:

(a) The 10% zero-bond would have a single before-tax payout of $1,000 . 1.1010 ≈ $2,593.74, for which the IRS would collect $1,593.74 . 25% ≈ $398.44 in year 10. This means that you would keep an after-tax zero-bond payout of $2,195.30.

(b) The 10% coupon bond has an after-tax rate of return of 7.5% per annum, because it is always taxed at 25% in the very same year. Reinvestment yields an after-tax rate of return of 7.5% ($75 in the first year on $1,000). After 10 years, you are left with $1,000 . 1.07510 ≈ $2,061.03.

(c) The tax savings on the zero-bond are $134 in 10 years. Therefore, the zero-bond is better.