xChapter 10 HomeworkCSach Textbook Sokution KGA Not secure l eztomheducation com
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xChapter 10 HomeworkCSach Textbook Sokution KGA Not secure l eztomheducation com/hm.tpr Managed bookmarks 1A Favorites?0'ice Depot ? Corporate Essensal. Fedex A newly issued bond pays its coupons once a year. Its a, Find the holding period return for a one year investment period if the bond s seling at a yield to maturity of 68% by the endof the year too not r and intermediat ale st -Besness Cards?lasership flWm Bidge OAS S Access Cards coupon rate is 4.6%, its maturity is 10 years, and its yield to maturity is 7 en Round your answer to 2 decimal places.) Holding-period return b. If you sell the bond after one year when its yield is 6 6%, what taxes wil, you owe irthe tax rate on interest income is 40% and te tax ate da capital gains ncone is 30%? The bond subject to original-issue discount (OID) tax treatment. (Do not round intermediate calculations Round your answers to 2 decimal places.) Tax on interest income Tax on capital gain Total taxes c. What is the after-tax holding-period return on the bond? (Do not round intermediate calculations. Round your answer to 2 decimal places.) After-tax holding-period return d. Find the realized compound yield before taxes for a two-year holding period assuming that (i you sel the bond afer t years, o ) the bond yield is 66% at the end of the second year Do not round intermediate calculations. Round your answer to 2 decimal places.) and (iii) the coupon can be reinvested for one year at a 2.6% interest rate Realized compound yield before taxes e. Use the tax rates in part (b) to compute the after-tax two-year realized compound yield Remember to take account of OIO tax rules. (Do not round intermediate ca a ations. Round your answer to 2 decimal places.) After-tax two-year realized compound yield References eBook & Resources A6242018Explanation / Answer
a. Price of the bond at issue =PV(rate,nper,pmt,fv) =PV(0.076,10,46,1000) = 795.01
Price of the bond after one year = PV(rate,nper,pmt,fv) =PV(0.066,9,46,1000) = 867.45
Holding period return = 867.45-795.01 + 46 = 118.43
Holding period return in % = 118.43/795.01 = 14.90%
b. Price of the bond after one year =PV(0.066,9,46,1000) = 867.45
Price of the bond after 1 year at 7.6% = PV(0.076,9,46,1000) = 809.44
Capital Gain =867.45-809.44 =58.01
Interest = $46 +809.44 - 795.01 = 60.43
Tax on Interest Income =60.43*0.4 =$24.17
Tax on Capital Gain = 72.43*0.3 = $17.40
Total taxes = 18.40+21.73 = $41.58
(c) After tax holding period return = 867.45-795.01+46-41.58 = 76.86
After tax holding period return in % = 76.86/795.01 = 9.67%
(d) Price of the bond after 2 years = PV(0.066,8,46,1000) = 878.70
Total return = 878.70 - 795.01 + 46*1.026 + 46 = 176.886
Total return before tax = 176.886/795.01 =0.222495
Realized compunded yield before taxes = (1+0.222495)^(1/2) -1 = 0.1057 = 10.57%
(e) Price after teo year 1 orginial yield = PV(0.076,8,46,1000) = 824.95
Interest = 46 *1.026 + 46 + 824.95-795.01 = 123.136
Capital gain = 878.70-824.95 = 53.75
Tax on Interest = 123.136*0.4 = 49.2544
Tax on Capital Gain = 63.75*0.3 = 16.125
Total taxes = 65.3794
After tax return =176.886 -65.3794 = 111.5066
After tax return % = 111.5066/795.01 = 0.140258
After tax two-year realized compounded yield = (1+0.140258)^(1/2)-1 = 6.78%
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