A newly issued bond pays its coupons once annually. Its coupon rate is 5.7%, its

Question

A newly issued bond pays its coupons once annually. Its coupon rate is 5.7%, its maturity is 20 years, and its yield to maturity is 8.5%. a. Find the holding-period return for a 1-year investment period if the bond is selling at a yield to maturity of 7.5% by the end of the year. b. If you sell the bond after 1 year, 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 tax treatment. c. What is the after-tax holding-period return on the bond? d. Find the realized compound yield before taxes for a 2-year holding period, assuming that (1) you sell the bond after 2 years, (2) the bond yield is 7.5% at the end of the second year, and (3) the coupon can be reinvested for 1 year at a 3% interest rate. e. Use the tax rates in part (b) to compute the after-tax 2-year realized compound yield. Remember to take account of OID tax rules.

Explanation / Answer

a.Intial Price,po= 753.03(n=20,pmt=57,fv=1,000,i=8.5)

Next year price = P1= $820.74(n=19,pmt= 57,fv =1,000, i= 7.5)

HPR=$57+(820.74-75303)/$753.03

HPR= 0.165611 = 16.56%

b.

Tax on income = $57*40% = $22.80

Tax on capital gain = $67.71*30%= $20.31

Total tax = $43.11

c.

After tax HPR = $124.71-22.80-20.31= $81.597/753.03 = .108792= 10.88%

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.