What is the after-tax holding-period return on bond

Assignment Help Financial Management

Reference no: EM131927926

A newly issued bond pays its coupons once a year. Its coupon rate is 4.5%, its maturity is 20 years, and its yield to maturity is 7.5%.

a. Find the holding-period return for a one-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.)

Holding-period return %

b. If you sell the bond after one year when its yield is 6.5%, 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 6.5% at the end of the second year, and (iii) the coupon can be reinvested for one year at a 2.5% 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 %

Reference no: EM131927926

Questions Cloud

Discuss pros vs. cons to managing more risk philosophy : Who is responsible for evaluating the progress of the strategic plan and the operational plan? Discuss 3-5 pros vs. cons to managing a more risk philosophy.

Trace the linear aspects of a photo : Digital Art 118 - Find a complex image in your DIA that is at least 1500 pixels on the shortest side and Create a new layer and name it Vectors

Make sure to talk about sign and size : (i) Interpret the parameter on GDP. Make sure to talk about Sign and Size.

What is the duration of the loan investment : What is the market value of the insurance company's loan investment after the changes in interest rates?

What is the after-tax holding-period return on bond : What is the after-tax holding-period return on the bond? Find the realized compound yield before taxes for a two-year holding period,

Explain the significant advantages of a business owner : Introduce yourself to the class, and share the key takeaways you hope to gain from this course. Explain the significant advantages and disadvantages.

What is the company cost of debt and cost of equity : What is the company’s cost of debt? What is the company’s cost of equity? What is the company’s weighted average cost of capital?

What is the responsibility of management : What is the responsibility of management toward the financial reporting? What are the steps that the company has to do in time of merger transaction?

What is monthly payment that amortizes loan under option : Identify the profit to your investment, at the call expiration, What is the monthly payment that amortizes the loan under this option?

User Account

All Pages