Zero coupon bond Answer: d Diff: M

7A-¹⁴¹. On January 1st Julie bought a 7-year, zero coupon bond with a face value of $1,000 and a yield to maturity of 6 percent. Assume that Julie’s tax rate is 25 percent. How much tax will Julie have to pay on the bond the first year she owns it?

b. $25.00

c. $73.76

d. $ 9.98

e. $83.74
Zero coupon bond and EAR Answer: d Diff: M

7A-¹⁴². U.S. Delay Corporation, a subsidiary of the Postal Service, must decide whether to issue zero coupon bonds or quarterly payment bonds to fund construction of new facilities. The $1,000 par value quarterly payment bonds would sell at $795.54, have a 10 percent annual coupon rate, and mature in 10 years. At what price would the zero coupon bonds with a maturity of 10 years have to sell to earn the same effective annual rate as the quarterly payment bonds?

b. $271.99

c. $198.89

d. $257.52

e. $254.84