26. A newly issued bond pays its coupons once annually. Its coupon rate is 5%, its maturity is 20 years, and its yield to maturity is 8%.

a. Find the holding-period return for a 1-year investment period if the bond is selling at a yield to maturity of 7% by the end of the year.

b. If you sell the bond after 1 year, what taxes will you owe if the tax rate on interest income is 40% and the tax rate on capital gains income is 30%? The bond is subject to original-issue discount tax treatment.

c. What is the after-tax holding-period return on the bond?

d. Find the realized compound yield before taxes for a 2-year holding period, assuming that

(1) you sell the bond after 2 years, (2) the bond yield is 7% at the end of the second year, and

(3) the coupon can be reinvested for 1 year at a 3% interest rate.

e. Use the tax rates in ( b ) above to compute the after-tax 2-year realized compound yield.

Remember to take account of OID tax rules.