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Problem 14-10 Assume You Have A 1-year Investment Horizon And Are Trying To Choose Among Three Bonds

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 9.2% coupon rate and pays the $92 coupon once per year. The third has a 11.2% coupon rate and pays the $112 coupon once per year. a. If all three bonds are now priced to yield 7% to maturity, what are the prices of: (i) the zero-coupon bond; (ii) the 9.2% coupon bond; (iii) the 11.2% coupon bond? (Round your answers to 2 decimal places.) Zero Coupon $ 508.35 9.2% Coupon 11.2% Coupon $ 1,154.52 $ 1,294.99 Current prices b. If you expect their yields to maturity to be 7% at the beginning of next year, what will be the price of each bond? (Round your answers to 2 decimal places.) Zero Coupon | $ 543.93 9.2% Coupon $ 1,143.34 11.2% Coupon $ 1,273.64 Price 1 year from now c. What is your before-tax holding-period return on each bond? (Round your answers to 2 decimal places.) Pre-tax rate of return Zero Coupon 7.00% 9.2% Coupon 7.00% 11.2% Coupon 7.00%
d. If your tax bracket is 30% on ordinary income and 18.8% 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 9.2% Coupon 4.901% 11.2% 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 6% at the beginning of next year. (Round your answers to 2 decimal places.) Price 1 year from now Pre-tax rate of return After-tax rate of return Zero Coupon 1$ 591.90 16.44 % % 9.2% Coupon $ 1.217.65 1 13.44 % 9.95 % 11.2% Coupon $ 1,353.69 13.18% 9.68%