= 4. Consider a bond with a face value of $100,000. Suppose that the bond pays coupons semi-annually at a rate of i(2) 10% per annum. The coupon payments are made on 15 July and on 15 January and the bond matures on 15 July in three years' time. (The first coupon payment is therefore due in six months' time). (a) Calculate the price paid for the bond assuming a yield of 8.5% per annum with semi-annual compounding. (b) Suppose that an investor pays the price determined in part (a). Suppose also that this investor pays tax at 15% on taxable income and capital gains. Capital losses can be treated as a negative capi- tal gain and offset against tax obligations. Stating any assumption required, calculate the after-tax yield earned by this investor.
= 4. Consider a bond with a face value of $100,000. Suppose that the bond pays coupons semi-annually at a rate of i(2) 10% per annum. The coupon payments are made on 15 July and on 15 January and the bond matures on 15 July in three years' time. (The first coupon payment is therefore due in six months' time). (a) Calculate the price paid for the bond assuming a yield of 8.5% per annum with semi-annual compounding. (b) Suppose that an investor pays the price determined in part (a). Suppose also that this investor pays tax at 15% on taxable income and capital gains. Capital losses can be treated as a negative capi- tal gain and offset against tax obligations. Stating any assumption required, calculate the after-tax yield earned by this investor.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:4. Consider a bond with a face value of $100,000. Suppose that the bond
=
pays coupons semi-annually at a rate of i(2) 10% per annum. The
coupon payments are made on 15 July and on 15 January and the bond
matures on 15 July in three years' time. (The first coupon payment is
therefore due in six months' time).
(a) Calculate the price paid for the bond assuming a yield of 8.5% per
annum with semi-annual compounding.
(b) Suppose that an investor pays the price determined in part (a).
Suppose also that this investor pays tax at 15% on taxable income
and capital gains. Capital losses can be treated as a negative capi-
tal gain and offset against tax obligations. Stating any assumption
required, calculate the after-tax yield earned by this investor.
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