A newly issued bond pays its coupons once a year. Its coupon rate is 5.8%, its maturity is 15 years, and its yield to maturity is 8.8%. a. Find the holding-period return for a one-year investment period if the bond is selling at a yield to maturity of 7.8% by the end of the year. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Answer is complete and correct. Holding-period return 18.00 % b. If you sell the bond after one year when its yield is 7.8%, 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 (OID) tax treatment. (Do not round intermediate calculations. Round your answers to 2 decimal places.) Answer is complete and correct. Tax on interest income Tax on capital gain Total taxes $ $ $ 26.58 20.83 47.41 c. What is the after-tax holding-period return on the bond? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Answer is complete and correct. After-tax holding-period return 11.82 % d. Find the realized compound yield before taxes for a two-year holding period, assuming that (1) you sell the bond after two years, (ii) the bond yield is 7.8% at the end of the second year, and (iii) the coupon can be reinvested for one year at a 3.8% interest rate. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Answer is complete and correct. Realized compound yield before taxes 12.64 % e. Use the tax rates in part (b) to compute the after-tax two-year realized compound yield. Remember to take account of OID tax rules. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Answer is complete but not entirely correct. After-tax two-year realized compound yield 8.28 % A newly issued bond pays its coupons once a year. Its coupon rate is 5.8%, its maturity is 15 years, and its yield to maturity is 8.8%. a. Find the holding-period return for a one-year investment period if the bond is selling at a yield to maturity of 7.8% by the end of the year. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Answer is complete and correct. Holding-period return 18.00 % b. If you sell the bond after one year when its yield is 7.8%, 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 (OID) tax treatment. (Do not round intermediate calculations. Round your answers to 2 decimal places.) Answer is complete and correct. Tax on interest income Tax on capital gain Total taxes $ $ $ 26.58 20.83 47.41 c. What is the after-tax holding-period return on the bond? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Answer is complete and correct. After-tax holding-period return 11.82 % d. Find the realized compound yield before taxes for a two-year holding period, assuming that (1) you sell the bond after two years, (ii) the bond yield is 7.8% at the end of the second year, and (iii) the coupon can be reinvested for one year at a 3.8% interest rate. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Answer is complete and correct. Realized compound yield before taxes 12.64 % e. Use the tax rates in part (b) to compute the after-tax two-year realized compound yield. Remember to take account of OID tax rules. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Answer is complete but not entirely correct. After-tax two-year realized compound yield 8.28 %
