1. When a certain type of bond matures, the bondholder is subject to a tax of 25
ID: 2697440 • Letter: 1
Question
1. When a certain type of bond matures, the bondholder is subject to a tax of 25% on the amount
of discount at which she or he bought the bond. A 1; 000 bond of this type has coupons of 4%
per year payable semi-annually and is redeemable at par in 10 years. No tax is payable on the
coupons. What price should a purchaser pay to realize an annual yield of 6% after taxes?
2. A fteen-year bond, which was purchased at a premium, has semiannual coupons. The amount
for amortization of the premium (also known as the amount for the adjustment of principal)
in the second coupon is $977:19 and the amount for amortization of premium in the fourth
coupon is 1; 046:79. Find the amount of the premium.
3. Dominique LeBlanc is the owner of a new ten-year $50; 000 8% par-value bond with a Bermuda
option and annual coupons. Allowable call dates are at the ends of year 6 through 10, and the
call premium at the end of year n is $300(10 n). Dominique purchased the bond for $51; 248.
(a) Find the lowest yield that Dominique may receive during the period she holds the bond
as well as the highest.
(b) Upon receipt, Dominique deposits each coupon and the redemption amount in an account
earning 6%. Find the lowest yield that Dominique may receive during the ten-year period
and also the highest.
Explanation / Answer
1)
BP = 20*PVIFA(2,20) + 1000/1.06^10 - ((1000-BP)*.25)/1.06^10
BP = 327+558.39-(100-BP)/7.16
BP+(100-BP)/7.16 = 885.39
6.16BP+100 = 885.39*7.16
BP = 6239.39/6.16 = 1012.88
2)
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