A newly issued bond pays its coupons once a year. Its coupons rate is 5%, its ma

Question

A newly issued bond pays its coupons once a year. Its coupons rate is 5%, its maturity is 20 years, and it yield to maturity is 8%. a. Find the holding period return for a one-year investment period if the bond is selling at a yield to maturity of 7% by the end of the year. b. If you sell the cond after one year when its yield is 7%, 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. 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, assing that (i) you sell the bond after two years, (ii) the cond yields is 7% at the end of the second year, and (iii) the coupon can be reinvested for one year at a 3% interest rate. e. Use the tax rate in part (b) to compute the after-tax two-year realized compound yield. Remember to take into account of OID tax rules.

Explanation / Answer

a. holding period return= 0.1954 or 19.54%

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