You currently hold two bonds. The first is a zero-coupon bond that pays $1,000 at maturity and
Question:
You currently hold two bonds. The first is a zero-coupon bond that pays $1,000 at maturity and matures in 5 years, and the second is a 6% coupon bond, which pays coupons semi-annually, and matures in 9 years. Your tax rate is 32% on ordinary income, and 26% on capital gains income. The yield to maturity is presently 6.5% p.a.
Required:
i. Calculate the prices of the two bonds now, assuming they are priced to yield 6.5% p.a.
ii. What is the price of each of your two bonds in one year, assuming that the yield to maturity will be 6.5% p.a. at that time? What is your pre-tax and after-tax holding period return over the year?
iii. Recalculate your answer to ii. above, but instead assume that the yield to maturity will be 5.5% p.a. one year from today.
Corporate Finance Core Principles And Applications
ISBN: 9781260571127
6th Edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Bradford Jordan