Find the holding-period return for given investment period

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Reference no: EM132017864

Question: 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 "tiny_mce_markerquot; 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 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 %

Reference no: EM132017864

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