1. You are considering investing in a bond that matures 20 years from now. It pays an annual end-of-year coupon rate of interest of 8.75 percent, or $87.50 per year. The bond currently sells for $919. Your marginal income tax rate (applied to interest payments) is 28 percent. Capital gains are taxed at the same rate as ordinary income. What is your after-tax rate of return if you buy this bond today and hold it until maturity?
2. Your parents have discovered a $1,000 bond at the bottom of their safe-deposit box. The bond was given to you by your late great-aunt Hilda on your second birthday. The bond pays interest at a rate of 5 percent per annum, compounded annually. Interest accumulates and is paid at the time the bond is redeemed. You are now 27 years old. What is the current worth of the bond (principal plus interest)?