Question

A newly issued bond pays its coupons once a year. Its coupon rate is 4.4%, its maturity is 15 years, and its yield to maturity is 7.4%.

a.	Find the holding-period return for a one-year investment period if the bond is selling at a yield to maturity of 6.4% 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 6.4%, 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 6.4% at the end of the second year, and (iii) the coupon can be reinvested for one year at a 2.4% 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

Answer 1

Answer is given in the below attached images

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