What is the price of the following zero-coupon bonds if interest rates are (a) 4, (b) 7,

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What is the price of the following zero-coupon bonds if interest rates are (a) 4, (b) 7, and (c) 10 percent?

• Bond A: zero-coupon; maturity 5 years

• Bond B: zero-coupon; maturity 10 years

• Bond C: zero-coupon; maturity 20 years

What generalization can be made concerning the term of a zero-coupon bond and its price in relation to changes in the level of interest rates?

You are in the 24 percent federal income tax bracket. A corporate bond offers you 6.8 percent while a tax-exempt bond with the same credit rating and term to maturity offers 4.1 percent. On the basis of taxation, which bond should be preferred? Explain.

A six-month $10,000 Treasury bill is selling for $9,844. What is the annual yield according to the discount method? Does this yield understate or overstate the true annual compound yield? Explain.

An investor in the 35 percent tax bracket may purchase a corporate bond that is rated A and yields 6.0 percent. The investor may also buy an A-rated municipal bond with a 3.9 percent yield. Why may the corporate bond be preferred?

Two firms have common stock and convertible bonds outstanding. Information concerning these securities is as follows:

a) What is the value of each bond in terms of stock?

b) What is the premium paid over each bond's value as stock?

c) What is each bond's income advantage over the stock into which the bond may be converted?

d) How long will it take for the income advantage to offset the premium determined in part (b)?

e) If after four years firm A's stock sells for $65 and the firm calls the bond, what is the holding period return and the annual rate of return earned on an investment in the stock or in the bond?