A newly issued bond pays its coupons once a year. Its coupon rate is 4.1%, its maturity
Question:
| A newly issued bond pays its coupons once a year. Its coupon rate is 4.1%, its maturity is 15 years, and its yield to maturity is 7.1%. |
| a. | Find the holding-period return for a one-year investment period if the bond is selling at a yield to maturity of 6.1% by the end of the year. ( Do not round intermediate calculations. Round your answer to 2 decimal places.) |
| Holding-period return | % |
| b. | If you sell the bond after one year when its yield is 6.1%, 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 (OID) tax treatment. ( Do not round intermediate calculations. Round your answers to 2 decimal places.) |
| Tax on interest income | $ |
| Tax on capital gain | $ |
| Total taxes | $ |
| | |
| c. | What is the after-tax holding-period return on the bond? ( Do not round intermediate calculations. Round your answer to 2 decimal places.) |
| After-tax holding-period return | % |
| d. | Find the realized compound yield before taxes for a two-year holding period, assuming that (i) you sell the bond after two years, (ii) the bond yield is 6.1% at the end of the second year, and (iii) the coupon can be reinvested for one year at a 2.1% interest rate. ( Do not round intermediate calculations. Round your answer to 2 decimal places.) |
| Realized compound yield before taxes | % |
| e. | Use the tax rates in part ( b ) to compute the after-tax two-year realized compound yield. Remember to take account of OID tax rules. ( Do not round intermediate calculations. Round your answer to 2 decimal places.) |
| After-tax two-year realized compound yield |
Expert Answer:
Solution Issue price of the bond Coupon payment x PVIFA 71 10years Maturity amount x PVIF 71 10th ye... View the full answer
