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Calculate the price paid by the second investor

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Reference no: EM132852243

Question - An investor purchased a bond with exactly 15 years to redemption.

The bond, redeemable at par, has a gross redemption yield of 5% per annum effective. It pays coupons of 4% per annum, half yearly in arrears. The investor pays tax at 25% on the coupons only.

(i) Calculate the price paid for the bond.

(ii) After exactly 8 years, immediately after the payment of the coupon then due, this investor sells the bond to another investor who pays income tax at a rate of 25% and capital gains tax at a rate of 40%. The bond is purchased by the second investor to provide a net return of 6% per annum effective.

(a) Calculate the price paid by the second investor.

(b) Calculate, to one decimal place, the annual effective rate of return earned by the first investor during the period for which the bond was held.

Reference no: EM132852243

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