A company issues a bond on the 1st January with a nominal amount of 100 and...

 

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A company issues a bond on the 1st January with a nominal amount of €100 and coupons payable quarterly in arrears at a rate of 8% per annum. The bond may be redeemed at €125 per €100 nominal on any coupon date between 10 and 15 years after the date of issue with the date of redemption at the option of the borrower. Assume that the bond is purchased by an investor who is subject to income tax at 25% and capital gains tax of 40% on the 1st March. (1) Determine if the investor would make a capital gain or loss if the bond is held until redemption assuming a yield of 5% per annum. [3] (ii) Calculate the price the investor should pay to obtain a minimum yield of 5% per annum. Discuss the main risks to the investor in purchasing this bond [7] [4] A company issues a bond on the 1st January with a nominal amount of €100 and coupons payable quarterly in arrears at a rate of 8% per annum. The bond may be redeemed at €125 per €100 nominal on any coupon date between 10 and 15 years after the date of issue with the date of redemption at the option of the borrower. Assume that the bond is purchased by an investor who is subject to income tax at 25% and capital gains tax of 40% on the 1st March. (1) Determine if the investor would make a capital gain or loss if the bond is held until redemption assuming a yield of 5% per annum. [3] (ii) Calculate the price the investor should pay to obtain a minimum yield of 5% per annum. Discuss the main risks to the investor in purchasing this bond [7] [4]

Answer rating: 100% (QA)

1 The investor would make a capital gain if the bond is held until redemption assuming a yield of 5 per annum The bond is issued at 100 and has a coup... View the full answer