60.1K

Verified Solution

Link Copied!

A newly issued bond pays its coupons once a year. Its coupon rate is 5.4%, its maturity is 15 years, and its yield to maturity is 8.4%.

Required:

a. Find the holding-period return for a one-year investment period if the bond is selling at a yield to maturity of 7.4% by the end of the year. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

b. If you sell the bond after one year when its yield is 7.4%, 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.)

c. What is the after-tax holding-period return on the bond? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

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 7.4% at the end of the second year, and (iii) the coupon can be reinvested for one year at a 3.4% interest rate. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

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.)

Answer & Explanation Solved by verified expert

See Answer