- 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?
- What would be the initial offering price for the following bonds (assume semiannual compounding)?
- A 15-year zero-coupon bond with a yield to maturity (YTM) of 12 percent
- 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:
- the 15 percent marginal tax bracket?
- the 25 percent marginal tax bracket?
- the 35 percent marginal tax bracket?
- 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).
- What is the market price of the bond?
- If interest rates remain constant, what will be the price of the bond in three years?
- If interest rates rise to 10 percent, what will be the price of the bond in three years?
- 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
