(a) Using Excel (for example) we get: Zero coupon 8% coupon 10% coupo

(a) Using Excel (for example) we get:

Zero coupon

8% coupon

10% coupon

Current prices

$463.19

$1000.00

$1134.20

(b)

Zero coupon

8% coupon

10% coupon

Price one year from

$500.25

$1000.00

$1124.94

Price increase

$37.06

$0.00

-$9.26

Coupon income

$0.00

$80.00

$100.00

Pre-tax income

$37.06

$80.00

$90.74

Pre-tax rate of return

8.00%

8.00%

8.00%

Taxes*

$11.12

$24.00

$28.15

After-tax income

$25.94

$56.00

$62.59

After-tax return

5.60%

5.60%

5.52%

* In computing taxes we have assumed that the 10% coupon bond was issued at par and that the drop in price when the bond is sold at year-end is treated
as a capital loss (tax rate = 20%) and not as an offset to ordinary income (tax rate = 30%).