A newly issued bond pays its coupons once annually. Its coupon rate is 5%, its maturity is 20 years, and its yield to maturity is 8%.a. Find the holding-period return for a 1-year investment period if the bond is selling at a yield to maturity of 7% by the end of the year.b. If you sell the bond after one year, 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 tax treatment.c. What is the after-tax holding-period return on the bond?d. Find the realized compound yield before taxes for a 2-year holding period, assuming that (i) you sell the bond after two years, (ii) the bond yield is 7% at the end of the second year, and (iii) the coupon can be reinvested for one year at a 3% interest rate.e. Use the tax rates in part (b) to compute the after-tax 2-year realized compound yield. Remember to take account of OID tax rules.
A newly issued bond pays its coupons once annually. Its coupon rate is 5%, its maturity is 20 years, and its yield to maturity is 8%.
a. Find the holding-period return for a 1-year investment period if the bond is selling at a yield to maturity of 7% by the end of the year.
b. If you sell the bond after one year, what taxes will you owe if the tax rate on interest income is 40% and the tax rate on
discount tax treatment.
c. What is the after-tax holding-period return on the bond?
d. Find the realized compound yield before taxes for a 2-year holding period, assuming that
(i) you sell the bond after two years, (ii) the bond yield is 7% at the end of the second year, and (iii) the coupon can be reinvested for one year at a 3% interest rate.
e. Use the tax rates in part (b) to compute the after-tax 2-year realized compound yield. Remember to take account of OID tax rules.
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 2 images
