A newly issued bond pays its coupons once a year. Its coupon rate is 5.6%, its maturity is 20 years, and its yield to maturity is 8.6%.
a. Find the holding-period return for a one-year investment period if the bond is selling at a yield to maturity of 7.6% 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 7.6%, 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 7.6% at the end of the second year, and (iii) the coupon can be reinvested for one year at a 3.6% 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 %
| A newly issued bond pays its coupons once a year. Its coupon rate is 5.6%, its maturity is 20 years, and its yield to maturity is 8.6%. |
| a. | Find the holding-period return for a one-year investment period if the bond is selling at a yield to maturity of 7.6% 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 7.6%, 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 7.6% at the end of the second year, and (iii) the coupon can be reinvested for one year at a 3.6% 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 | % |
Related questions
| A newly issued bond pays its coupons once annually. Its coupon rate is 6.7%, its maturity is 20 years, and its yield to maturity is 7.5%. |
| a. | Find the holding-period return for a 1-year investment period if the bond is selling at a yield to maturity of 6.5% by the end of the year. (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "%" sign in your response.) |
| Holding-period return | % |
| 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. (Do not round intermediate calculations. Round your answers to 2 decimal places. Omit the "$" sign in your response.) |
| 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. Omit the "%" sign in your response.) |
| After-tax holding-period return | % |
| 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 6.5% at the end of the second year, and (3) the coupon can be reinvested for 1 year at a 3% interest rate. (Do not round intermediate calculations.Round your answer to 2 decimal places. Omit the "%" sign in your response.) |
| Realized compound yield before taxes | % |
| e. | Use the tax rates in part (b) to compute the after-tax 2-year realized compound yield. Remember to take account of OID tax rules. (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "%" sign in your response.) |
| After-tax 2-year realized compound yield | % |
| Below is a list of prices for zero-coupon bonds of various maturities. |
| Maturity (Years) | Price of $1,000 Par Bond (Zero-Coupon) |
| 1 | $988.50 |
| 2 | 891.00 |
| 3 | 844.90 |
| a. | An 5.2% coupon $1,000 par bond pays an annual coupon and will mature in 3 years. What should the yield to maturity on the bond be? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "%" sign in your response.) |
| Yield to maturity | % |
| b. | If at the end of the first year the yield curve flattens out at 6.2%, what will be the 1-year holding-period return on the coupon bond? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "%" sign in your response.) |
| Holding-period return | % |
