Molly Matters Inc. issues a split-coupon $1,500 bond that matures in seven years

Question

Molly Matters Inc. issues a split-coupon $1,500 bond that matures in seven years. Interest payments are $120 a year (8 percent) and start after three years have lapsed. The bond initially sells for a discounted price of $1,190.75. You are in the 30 percent income tax bracket and purchase the bond. What are the annual taxes owed on the interest? Round your answers to the nearest cent.

Year 1 $

Year 2 $

Year 3 $

Year 4 $

Year 5 $

Year 6 $

Year 7 $

You are in the 30 percent income tax bracket and purchase the bond in your IRA. What are the annual taxes owed on the interest? Round your answers to the nearest cent.

Year 1 $

Year 2 $

Year 3 $

Year 4 $

Year 5 $

Year 6 $

Year 7 $

please show your work.

Explanation / Answer

a.

Coupon Income after three years=$120

Capital gain after 7 years =$1500-$1190.75=$309.25

Annual Tax for (7-3-1) =3years will be equal to tax on coupon i.e. 30%*$120=$36.

For last year annual tax will be equal to tax on (coupon+ Capital Gain) = 30 %*( 120+309.25)=$30%*$429.25 = $128.78

b.

Investors do not have to pay taxes on the interest and capital gains they earn within the IRA

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