= 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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Bond Valuation

Bond valuation are the notes issued by the corporation to raise long-term funds for the business. The corporations are required to pay the interest on such liabilities at a specified rate of interest (termed as coupon rate) at specified dates which may be on semi-annual or annual basis. These interest payments may be in the form of coupons.