Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

A newly issued bond pays its coupons once a year. Its coupon rate is 5.2%, its maturity is 10 years, and its yield to maturity

A newly issued bond pays its coupons once a year. Its coupon rate is 5.2%, its maturity is 10 years, and its yield to maturity is 8.2%.

a.

Find the holding-period return for a one-year investment period if the bond is selling at a yield to maturity of 7.2% by the end of the year. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Holding-period return %

b.

If you sell the bond after one year when its yield is 7.2%, 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.)

Tax on interest income $
Tax on capital gain $
Total taxes $

c.

What is the after-tax holding-period return on the bond? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

After-tax holding-period return %

d.

Find the realized compound yield before taxes for a two-year holding period, assuming that (i) you sell the bond after two years, (ii) the bond yield is 7.2% at the end of the second year, and (iii) the coupon can be reinvested for one year at a 3.2% interest rate. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Realized compound yield before taxes %

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.)

After-tax two-year realized compound yield %

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financing California Real Estate Spanish Missions To Subprime Mortgages

Authors: Lynne P. Doti

1st Edition

184893601X, 978-1848936010

More Books

Students also viewed these Finance questions

Question

a. How will the leader be selected?

Answered: 1 week ago