12. A newly issued bond pays its coupons once annually. Its coupon rate is 5 per
ID: 1171164 • Letter: 1
Question
12. A newly issued bond pays its coupons once annually. Its coupon rate is 5 percent, its maturity is a. Find the holding-period return for a one-year investment period if the bond is selling at a yield b. If you sell the bond after one year, what taxes will you owe if the tax rate on interest income is 20 years, and its yield to maturity is 8 percent. to maturity of 7 percent by the end of the year. 40 percent and the tax rate on capital gains income is 30 percent? The bond is subject to origi- nal issue discount tax treatment. c. What is the after-tax holding-period return on the bond? d. Find the realized compound yield before taxes for a two-year holding period, assuming that (1) you sell the bond after two years, (2) the bond yield is 7 percent at the end of the second year, and (3) the coupon can be reinvested for one year at a 3 percent interest rate e. Use the tax rates in part (b) to compute the after-tax two-year realized compound yield. Re- member to take account of OID tax rulesExplanation / Answer
a.
Holding Period Return = Earnings + Asset Appreciation
Initial Investment
= (5 + 7)*100 / 100
= 12%
b.
After tax HPR = (After tax Earnings + After tax appreciation) / Initial Investment
= (3 + 4.9)*100 / 100
=7.9%
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