A newly issued bond pays its coupons once a year. Its coupon rate is 5.3%, its m

Question

A newly issued bond pays its coupons once a year. Its coupon rate is 5.3%, its maturity is 20 years, and its yield to maturity is 8.3%.

a. Find the holding-period return for a one-year investment period if the bond is selling at a yield to maturity of 7.3% by the end of the year. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Holding-period return %

b. If you sell the bond after one year when its yield is 7.3%, 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. (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 sell the bond after two years, (ii) the bond yield is 7.3% at the end of the second year, and (iii) the coupon can be reinvested for one year at a 3.3% interest rate. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

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 OID tax rules. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

After-tax two-year realized compound yield %

Explanation / Answer

a

                    K = N          
BOND PRICE= [(Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N
                   k=1

                    K = 20   
BOND PRICE= [(5.3*1000/100)/(1 + 8.3/100)^k]     +   1000/(1 + 8.3/100)^10
                   k=1

Beginning year price = 711.916

K = 19
BOND PRICE= [(5.3*1000/100)/(1 + 7.3/100)^k]     +   1000/(1 + 7.3/100)^10
                   k=1

End of year price = 797.858

Holding period return : ((End of year price+coupon)/beginning year price)-1)*100 = ((797.858+53)/711.19)-1)*100 = 19.64%

b

Tax on CG = capital gain *(tax rate for CG) = (797.858-711.19)*0.3 = 26

Tax on interest = interest *(tax rate for interest income) = 53*0.4 = 21.2

c

After tax return =

((End of year price+coupon-Tax on CG-Tax on interest)/beginning year price)-1)*100 = ((797.858+53-26-21.2)/711.19)-1)*100 = 13%

Please ask D and E seperately

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