Question

A newly issued 10-year maturity, 10% coupon bond making annual coupon payments is sold to the public at a price of $933. What will be an investor’s taxable income from the bond over the coming year? The bond will not be sold at the end of the year. The bond is treated as an original issue discount bond. (Round your answer to 2 decimal places.)

Answer 1

Annual coupon = coupon rate*par value = 10%*1,000 = 100

YTM: FV (par value) = 1,000; PMT (annual coupon) = 100; PV (current price) = -933; N (number of coupons) = 10, solve for RATE.

YTM = 11.145%

Using constant yield method, price of the bond after one year will be: FV = 1,000; PMT = 100; N = 9; rate = 11.145%, solve for PV.

Price = 936.98

Increase in price over one year = price after one year (at same yield) - current price = 936.98 - 933 = 3.98

Taxable income = annual coupon + increase in price = 100 + 3.98 = 103.98 (Answer)