A company that pays tax at the rate of 25% on income and 30% on capital gains is considering purchasing a bond at a price that would ensure a net redemption yield of at least 6.5% per annum. A bond of nominal value £100,000 which pays half-yearly coupons of 7.5% per annum in arrears is available. It is redeemable at 105% at the option of the borrower on any coupon payment date between 15 and 20 years (inclusive) after the date of purchase. (i) Determine whether or not the company would make a capital gain if the bond is purchased and is held until redemption. (ii) Explain how your answer to part (i) influences the assumptions made in calculating the maximum price that the company should pay for the bond for the given target net redemption yield. (iii) Calculate the maximum price that the investor should pay. (iv) The annual rate of inflation expected by the company over the period during which the stock is held is 3.5% per annum effective. Calculate the minimum real annual effective rate of return which the company can expect to obtain on this investment to the nearest 0.1%.
A company that pays tax at the rate of 25% on income and 30% on capital gains is considering purchasing a bond at a price that would ensure a net redemption yield of at least 6.5% per annum. A bond of nominal value £100,000 which pays half-yearly coupons of 7.5% per annum in arrears is available. It is redeemable at 105% at the option of the borrower on any coupon payment date between 15 and 20 years (inclusive) after the date of purchase. (i) Determine whether or not the company would make a capital gain if the bond is purchased and is held until redemption. (ii) Explain how your answer to part (i) influences the assumptions made in calculating the maximum price that the company should pay for the bond for the given target net redemption yield. (iii) Calculate the maximum price that the investor should pay. (iv) The annual rate of inflation expected by the company over the period during which the stock is held is 3.5% per annum effective. Calculate the minimum real annual effective rate of return which the company can expect to obtain on this investment to the nearest 0.1%.
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
Related questions
Question
Solve it using formulas, no tables
correct answers are:
i) i^2= 0.063977 > 0.0536
iii) Po= £91,630.9
iv) i'= 0.028985 = 2.9% pa
Transcribed Image Text:A company that pays tax at the rate of 25% on income and 30% on capital gains is
considering purchasing a bond at a price that would ensure a net redemption yield of at least
6.5% per annum.
A bond of nominal value £100,000 which pays half-yearly coupons of 7.5% per annum in
arrears is available. It is redeemable at 105% at the option of the borrower on any coupon
payment date between 15 and 20 years (inclusive) after the date of purchase.
(i) Determine whether or not the company would make a capital gain if the bond is
purchased and is held until redemption.
(ii) Explain how your answer to part (i) influences the assumptions made in calculating the
maximum price that the company should pay for the bond for the given target net
redemption yield.
(iii) Calculate the maximum price that the investor should pay.
(iv) The annual rate of inflation expected by the company over the period during which the
stock is held is 3.5% per annum effective. Calculate the minimum real annual effective
rate of return which the company can expect to obtain on this investment to the
nearest 0.1%.
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