At t=0 you buy a bond that has 4 years to maturity and pays annual coupons at
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Question:
At t=0 you buy a bond that has 4 years to maturity and pays annual coupons at a coupon rate of 5% on a par value of $1,000. At t=0 the bond trades at a yield-to-maturity of 10%. In one year (t=1), you receive the first coupon payment and immediately sell the bond. At t=1, the bond (with 3 years remaining) still trades at a yield-to-maturity of 10%. What is the capital gain in percentage terms and the net gain in percentage terms from the sale of the bond over the one-year period (i.e., from t=0 to t=1)? (20 MARKS)
Are there differences in tax treatment between bond coupons and stock dividends from the point of view of a buyer of securities? How is each income source taxed? Explain. (15 MARKS)
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