Peter Chan has just inherited some money when his uncle passed away recently. He wants to invest the money in a government bond because he wants to receive a steady stream of interest income and preserve his capital when the bond matures. His marginal tax rate on interest income is 40% and marginal tax rate on realized capital gains is 20%. He plans to buy a 4 percent coupon bond with ten years to maturity and pays interest semi-annually. He intends to hold the bond until maturity. The current price of the bond is $960.

Required:

(a) What is the before-tax yield to maturity (APR)? What is the before-tax EAR (effective annual rate)? (4 Marks)

(b) What is the after-tax EAR (effective annual rate)? (6 Marks)