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