An 8-year 10% Treasury bond is sold to yield j2 = 14% p.a. Suppose coupon payments reinvested at j2 = 11% p.a. This Treasury bond’s face value of $100 that matures at par.

a. Calculate the total realized compound yield (TRCY) as a j2 rate. Give your answer as a percentage correct to two decimal places.

b. An investor Zack has purchased this Treasury bond at issuing and sold it 18 months later at yield j2 = 12.5% p.a. Calculate the holding period rate (HPY) as a j2 rate. Give your answer as a percentage correct to two decimal places.

c. Assume that this Treasury bond is subject to a 30% tax on interest and capital gain. Calculate the price at issuing (rounded to three decimal places). Assume the net yield rate is j2 = 10% p.a.

d. Re-calculate your part c, if all tax payments are delayed by a half year from when taxable cash flows occur. Assume the net yield rate is j2 = 10% p.a.

Answer rating: 100% (QA)

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