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A fixed interest security was issued on 1 January in a given year. The security pays half - yearly coupons of 4 % per annum.

A fixed interest security was issued on 1 January in a given year. The security pays half-yearly
coupons of 4% per annum. The security is redeemable at 110%20 years after issue. An investor
who pays both income tax and capital gains tax at a rate of 25% buys the security on the date of
issue. Income tax is paid on coupons at the end of the calendar year in which the coupon is received.
Capital gains tax is paid immediately on sale or redemption.
(i) Calculate the price paid by the investor to give a net rate of return of 6% per annum
effective.
(ii) Calculate the duration of the net payments from the fixed interest security for an
investor who pays income tax as described above but who does not pay capital gains
tax, at a rate of interest of 6% per annum effective.

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