Consider a perpetuity with a coupon of 100. Imagine that the perpetuity is purchased at time t when the market interest rate is equal to 5%. Furthermore, imagine that the coupon income is taxed at 40% and that capital gains are taxed at 20%. What is the after tax rate of return if the perpetuity is sold at time t+1 when the market interest rate continues to be equal to 5%?

Consider a perpetuity with a coupon of 100. Imagine that the perpetuity is purchased at time t when the market interest rate is equal to 5%. Furthermore, imagine that the coupon income is taxed at 40% and that capital gains are taxed at 20%. What is the after tax rate of return if the perpetuity is sold at time t+1 when the market interest rate continues to be equal to 5%?

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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Question

Consider a perpetuity with a coupon of 100. Imagine
that the perpetuity is purchased at time t when the
market interest rate is equal to 5%. Furthermore,
imagine that the coupon income is taxed at 40% and
that capital gains are taxed at 20%. What is the after
tax rate of return if the perpetuity is sold at time t+1
when the market interest rate continues to be equal
to 5%?
0%
O 2%
5%
None of the above

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