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

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.

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To calculate the prices of the bonds we can use the present value formula Bond Price Coupon Payment 1 Yieldn Face Value 1 Yieldn Where Coupon Payment ... View full answer

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