A newly issued bond pays its coupons once a year. Its coupon rate is 4.7%, its maturity is 15 years, and its yield to maturity is 7.7%. a. Find the holding-period return for a one-year investment period if the bond is selling at a yield to maturity of 6.7% 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 6.7%, 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.) Tax on interest income $ Tax on capital gain $ Total taxes $ 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 6.7% at the end of the second year, and (iii) the coupon can be reinvested for one year at a 2.7% 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 %
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A newly issued bond pays its coupons once a year. Its coupon rate is 4.7%, its maturity is 15 years, and its yield to maturity is 7.7%. |
| a. |
Find the holding-period return for a one-year investment period if the bond is selling at a yield to maturity of 6.7% 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 6.7%, what taxes will you owe if the tax rate on interest income is 40% and the tax rate on |
| Tax on interest income | $ |
| |
$ |
| Total taxes | $ |
| 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 6.7% at the end of the second year, and (iii) the coupon can be reinvested for one year at a 2.7% 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 | % |
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