I POSTED THIS SAME QUESTION EARLIER AND THE ANSWER IS INCORRECT. DO NOT COPY AND

Question

I POSTED THIS SAME QUESTION EARLIER AND THE ANSWER IS INCORRECT. DO NOT COPY AND PASTE IT HERE! THANKS.

A newly issued bond pays its coupons once a year. Its coupon rate is 4.5%, its maturity is 20 years, and its yield to maturity is 7.5%.

a. Find the holding-period return for a one-year investment period if the bond is selling at a yield to maturity of 6.5% 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 6.5%, 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.)

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 6.5% at the end of the second year, and (iii) the coupon can be reinvested for one year at a 2.5% 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) Face Value (FV) $1,000 Coupon Rate 4.50% Coupon Payment = PMT = 1000 x 4.50% $45 YTM (Rate) 7.50% Nper 20 Present Value (PV(7.50%,20,-$45,-1000) $694.17 Face Value (FV) $1,000 Coupon Rate 4.50% Coupon Payment = PMT = 1000 x 4.50% $45 YTM (Rate) 6.50% Nper 19 Present Value (PV(6.50%,19,-$45,-1000) $785.31 Holding period return = [coupon interest + (selling price - purchase price)]/Purchase price Holding period return = $45 + ($785.31 - $694.17)/$694.17 19.61% b) Year 0 year 1 Face Value (FV) $1,000 $1,000 Coupon Rate 4.50% 4.50% Coupon Payment = PMT = 1000 x 4.50% $45 $45 YTM (Rate) 7.50% 7.50% Nper 20 19 Present Value (PV(7.50%,20,-$45,-1000) $694.17 $701.23 Implies implicit interest over first year ($701.23 - $694.17) $7.06 Tax on interest income= Tax on explicit + implicit interest in the first year = 0.40 x ($45 + $7.06) $20.82 Tax on capital gain ($785.31 - $694.17) x 30% $27.34 Total taxes = $20.82 + $27.34 $48.17 c) After Tax Holding period return = $45 + ($785.31 - $694.17) - $48.17 /$694.17 12.67% d) Realized Compound Yield Face Value (FV) $1,000 Coupon Rate 4.50% Coupon Payment = PMT = 1000 x 4.50% $45 YTM (Rate) 7.50% Nper 20 Present Value (PV(7.50%,20,-$45,-1000) $694.17 Face Value (FV) $1,000 Coupon Rate 4.50% Coupon Payment = PMT = 1000 x 4.50% $45 YTM (Rate) 6.50% Nper 18 Present Value (PV(6.50%,18,-$45,-1000) $791.35 Earnings from Coupons = $45 x (1+ 2.50%) + $45 $91.13 Holding period return($791.35 - $694.17 + $91.13)/$694.17 27.13% Realized Compound Yield before taxes = sqrt(27.13%+1) – 1 12.75%

Related Questions

Navigate

• Browse (All)
• Browse I
• Subjects

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