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Question 3 ( 2 0 points ) A bond pays a fixed coupon of 6 % p . a . quarterly in arrears and is

Question 3(20 points) A bond pays a fixed coupon of 6% p.a. quarterly in arrears and is re- deemed at 102%. An investor who pays income tax 20% and capital gains tax at 25% is considering 100 EUR nominal of the bond. (1) Calculate the price the investor should pay if the bond is redeemed after 10Y so as to obtain a net yield of (i)8% p.a. effective (ii)10% p.a. effective. (2) The investor purchases the bond for price of i)100 eur ii)112 eur and redeems the bond after 10 years. Estimate, using the linear interpolation, the net yield achieved in both cases.

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