Consider a bond market where two credit risk free bonds are traded. Short selling is not allowed. There is only a tax rate for coupon payments (capital gains are tax free). The current forward interest rate for a one year loan In year 2 is 14,15%. Bond 1 matures after 1 year, has a coupon of 15%, a nominal value equal to 100 and a market value equal to 105.66. Bond 1 matures after 2 years, has a coupon of 20%, a nominal value equal to 100 and a market value equal to 110.96. What is the tax rate for coupon payments?

Answer rating: 100% (QA)

To solve this problem we need to first calculate the spot interest rates for years 1 and 2 which wil... View the full answer