A newly issued bond pays its coupons once annually. Its coupon rate is 5.4%, its maturity is 20 years, and its yield to maturity is 12%. Required: Find the holding-period return for a 1-year investment period if the bond is selling at a yield to maturity of 11% by the end of the year. If you sell the bond after one 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. What is the after-tax holding-period return on the bond?
A newly issued bond pays its coupons once annually. Its coupon rate is 5.4%, its maturity is 20 years, and its yield to maturity is 12%.
Required:
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Find the holding-period return for a 1-year investment period if the bond is selling at a yield to maturity of 11% by the end of the year.
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If you sell the bond after one 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. -
What is the after-tax holding-period return on the bond?
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Find the realized compound yield before taxes for a 2-year holding period, assuming that (i) you sell the bond after two years, (ii) the bond yield is 11% at the end of the second year, and (iii) the coupon can be reinvested for one year at a 3% interest rate.
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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.
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