1. An investor in the 28 percent tax bracket is trying to decide which of two bonds to purchase. One is a corporate bond carrying an 8 percent coupon and selling at par. The other is a municipal bond with a 5½ percent coupon, and it, too, sells at par. Assuming all other relevant factors are equal, which bond should the investor select?


  1. What would be the initial offering price for the following bonds (assume semiannual compounding)?
  2. A 15-year zero-coupon bond with a yield to maturity (YTM) of 12 percent
  3. A 20-year zero-coupon bond with a YTM of 10 percent


3. An 8.4 percent coupon bond issued by the state of Indiana sells for $1,000. What coupon rate on a corporate bond selling at its $1,000 par value would produce the same after-tax return to the investor as the municipal bond if the investor is in:

  1. the 15 percent marginal tax bracket?
  2. the 25 percent marginal tax bracket?
  3. the 35 percent marginal tax bracket?


  1. The Shamrock Corporation has just issued a $1,000 par value zero-coupon bond with an 8 percent yield to maturity, due to mature 15 years from today (assume semiannual compounding).
  2. What is the market price of the bond?
  3. If interest rates remain constant, what will be the price of the bond in three years?
  4. If interest rates rise to 10 percent, what will be the price of the bond in three years?


  1. Complete the information requested for each of the following $1,000 face value, zero-coupon bonds, assuming semiannual compounding.


Bond  Maturity (Years)         Yield (Percent)           Price ($)

A         20                                12                                ?

B         ?                                  8                                  601

C         9                                  ?                                  350