Suppose that the yield to maturity of the 5% coupon, 25-year maturity bond falls to 7% by the end of the first year and that the investor sells the bond after the first year. If the investor's federal plus state tax rate on interest income is 30% and the combined tax rate on capital gains is 20%, what is the investor's after- tax rate of return?

Suppose that the yield to maturity of the 5% coupon, 25-year maturity bond falls to 7% by the end of the first year and that the investor sells the bond after the first year. If the investor's federal plus state tax rate on interest income is 30% and the combined tax rate on capital gains is 20%, what is the investor's after- tax rate of return?

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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Suppose your marginal federal income tax rate is 25 percent. 1. What is your after-tax return from holding a one-year corporate bond with a yield of 5.25 percent? (1 pt) 2. What is your after-tax return from a holding a one-year municipal bond with a yield of 4 percent? (1 pt) 3. How would you decide which bond to hold? (Assume that Both bonds carry the same risk.) (1 pt)
Please show work You want to purchase a bond that will pay you $300 per year for the next four years. If the annual interest rate is 4%, then what is the price of your bond if the market is in equilibrium? You buy a stock that is expected to pay a dividend of $300 per year for the next four years. If the discount rate is 5.5%, then what is the stock price in this case? Is this result the one you would expect when comparing this answer to the one you obtained in question 3? Why or why not?
4. You bought a 10-year, 5% coupon bond for $1,000 and sold it 1 year later for $1,100. What is the rate of return on your investment if the bond pays interest annually? If your marginal tax rate is 30%, and 50% of capital gains are taxable, what is the after-tax rate of return on your bond investment?
If you buy municipal bond (tax free) that cost $1,000 and will pay a 4.7% coupon every year for the next 10 years (so the maturity date is in 10 years). At maturity the bond returns the original $1,000. If there is a 2.5% annual inflation, a) what real rate of return will you receive? b) How much real $ profit did you make from the bond?
If the 10 year government bond rate is 2.78% and the long term return on the market as proxied by the ASX is 5.85%, assuming the beta for WBC is 1.26 and for CBA is 1.23, use the Capital Asset Pricing Model (CAPM) to find the expected returns for WBC and CBA.
An investor is considering the purchase of a bond. The bond has a face value of $1000 and an interest rate of 6%; it pays interest once a year and matures in 8 years. This investor’s real MARR is 25%. If the investor expects an inflation rate of 4% per year for the next 8 years, how much should he be willing to pay for the bond?
Suppose your company needs to raise $35.8 million and you want to issue 23- year bonds for this purpose. Assume the required return on your bond issue will be 8.3 percent, and you?re evaluating two issue alternatives: a 8.3 percent semiannual coupon bond and a zero coupon bond. Your company's tax rate is 35 percent. Requirement 1: (a) How many of the coupon bonds would you need to issue to raise the $35.8 million? (b) How many of the zeroes would you need to issue? Requirement 2: (a) In 23 years, what will your company's repayment be if you issue the coupon bonds? (b) What if you issue the zeroes? Requirement 3: Assume that the IRS amortization rules apply for the zero coupon bonds. Calculate the firm's aftertax cash outflows for the first year under the two different scenarios.
Consider a 30-year 8 percent bond, paying coupon semi-annually, and selling for $960. If the bond is sold 14 years later for $990, what is the investor’s holding period yield?
Suppose you invest in a municipal bond that pays a yield of 4. If your marginal tax is 17%, what is the equvalent yield on the taxable bond? (write your answer in percentage and round it to 2 decimal places)
suppose you own a 40-year bond that has a bond rate of 2% per year. 1. How much money will you lose if the value of the bond today is $10,000 (face value of the bond) and the yield increases to 3% ? 2. If this bond is purchased now for $5,000, what yearly yield would the buyer receive?
2) Consider the decision to purchase either a 7-year corporate bond or a 7-year municipal bond. The corporate bond is a 14% annual coupon bond with a par value of $1,000. It is currently yielding 12%, The municipal bond has an 9% annual coupon and a par value of $1,000. It is currently yielding 8%. Which of the two bonds would be more beneficial to you? Assume that your marginal tax rate is 30%.
You just bought a $1,000 bond that is scheduled to mature in ten years. If interest rates rise during the next six months, the market value (or price) of your bond will increase. O decrease. remain unchanged. increase or decrease, depending on the marginal tax bracket you are in.

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