Question

Peter Chan has just inherited some money when his uncle passed away recently. He wants to...

Peter Chan has just inherited some money when his uncle passed away recently. He wants to invest the money in a government bond because he wants to receive a steady stream of interest income and preserve his capital when the bond matures. His marginal tax rate on interest income is 40% and marginal tax rate on realized capital gains is 20%. He plans to buy a 4 percent coupon bond with ten years to maturity and pays interest semi-annually. He intends to hold the bond until maturity. The current price of the bond is $960.

Required:

  1. What is the before-tax yield to maturity (APR)? What is the before-tax EAR (effective annual rate)?
  2. What is the after-tax EAR (effective annual rate)?

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