A newly issued bond pays its coupons once annually. Its coupon rate is 5%, its maturity is

Question:

A newly issued bond pays its coupons once annually. Its coupon rate is 5%, its maturity is 20 years, and its yield to maturity is 8%.

a. Find the holding-period return for a 1-year investment period if the bond is selling at a yield to maturity of 7% by the end of the year.

b. If you sell the bond after 1 year, what taxes will you owe if the tax rate on interest income is 40% and the tax rate on capital gains income is 30%? The bond is subject to original-issue discount tax treatment.

c. What is the after-tax holding-period return on the bond?

d. Find the realized compound yield before taxes for a 2-year holding period, assuming that

(1) You sell the bond after 2 years,

(2) The bond yield is 7% at the end of the second year, and

(3) The coupon can be reinvested for 1 year at a 3% interest rate.

e. Use the tax rates in (b) above to compute the after-tax 2-year realized compound yield. Remember to take account of OID tax rules.

Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a... Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest...