A fixed interest security pays coupons of 5% per annum convertible half-yearly in arrears. The security is redeemable at 110% at the option of the borrower on any anniversary date between 15 and 25 years after the date of issue. An investor, who is liable to tax on income at a rate of 25% and on capital gains at a rate of 30%, intends to buy the product exactly two months after issue for a price that gives a net effective yield of at least 6% per annum. (1) Determine whether the investor would make a capital gain if the bond is held until redemption.
A fixed interest security pays coupons of 5% per annum convertible half-yearly in arrears. The security is redeemable at 110% at the option of the borrower on any anniversary date between 15 and 25 years after the date of issue. An investor, who is liable to tax on income at a rate of 25% and on capital gains at a rate of 30%, intends to buy the product exactly two months after issue for a price that gives a net effective yield of at least 6% per annum. (1) Determine whether the investor would make a capital gain if the bond is held until redemption.
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:A fixed interest security pays coupons of 5% per annum convertible half-yearly in arrears. The
security is redeemable at 110% at the option of the borrower on any anniversary date between 15
and 25 years after the date of issue. An investor, who is liable to tax on income at a rate of 25% and
on capital gains at a rate of 30 %, intends to buy the product exactly two months after issue for a
price that gives a net effective yield of at least 6% per annum. (1) Determine whether the investor
would make a capital gain if the bond is held until redemption.
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Step 1: Understanding the Terms and Components
VIEWStep 2: Determining Half-Yearly Coupon Rate
VIEWStep 3: Calculating Annual Yield Before Tax
VIEWStep 4: Adjusting for Taxes on Income and Capital Gains
VIEWStep 5: Assessing Capital Gains Tax on Redemption
VIEWStep 6: Evaluating Net Effective Yield
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