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Assume your marginal tax rate is 25%. Assume that the IRS would tax payments only when made. (Sorry, in real life, the IRS nowadays does tax zero-bonds even when they do not yet pay out anything.)

(a) What is the future value of a 10-year zero-bond priced at a YTM of 10%? How much does the IRS get to keep?

(b) What is the future value of a 10-year annual level-coupon bond priced at a YTM of 10%, assuming that coupons are immediately reinvested at the same 10%?

(c) What would it be worth to you today to be taxed only at the end (via the zero-bond) and not in the interim (via the coupon bond)? Which is better?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M91991497

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