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 4%, its maturity is 10 years, and its yield to maturity

A newly issued bond pays its coupons once a year. Its coupon rate is 4%, its maturity is 10 years, and its yield to maturity is 7%.

Required:

a. Find the holding-period return for a one-year investment period if the bond is selling at a yield to maturity of 6% by the end of the year. (Do not round intermediate calculations. Round your answer to 2 decimal places.) image text in transcribed

b. If you sell the bond after one year when its yield is 6%, 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.) image text in transcribed

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

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 6% at the end of the second year, and (iii) the coupon can be reinvested for one year at a 2% interest rate. (Do not round intermediate calculations. Round your answer to 2 decimal places.) image text in transcribed

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.) image text in transcribed

Holding-period return % \begin{tabular}{l} \hline Tax on interest income \\ \hline Tax on capital gain \\ \hline Total taxes \end{tabular} \begin{tabular}{|l|l|l|} \hline After-tax holding-period return & & % \\ \hline \end{tabular} Realized compound yield before taxes \begin{tabular}{|l|l|} \hline After-tax two-year realized compound yield & \\ \hline \end{tabular}

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

Business Finance

Authors: Eddie McLaney

11th Edition

1292134402, 9781292134406

More Books

Students also viewed these Finance questions

Question

Write down the Limitation of Beer - Lamberts law?

Answered: 1 week ago

Question

Discuss the Hawthorne experiments in detail

Answered: 1 week ago

Question

Explain the characteristics of a good system of control

Answered: 1 week ago

Question

State the importance of control

Answered: 1 week ago