Question

. A bond of $7,000 nominal pays coupons of 6% per annum at the end of each year and is redeemable at par on 31 December 2028. (The last coupon is also payable on that date.) Calculate (to 2 decimal places) the net yield per annum, if the bond is purchased for $5,000 on 1 January 2019. The income tax rate during this period is 25% and the capital gains tax rate is 30%.

Answer 1

Period between 2019-2028 is 10 years

Particulars	Amount in $
Interest to be received (7000*6%*10years)	4200
Redeemable value of bond in year 2028	7000
Total cash flows from bond till 2028	11200
Less : Cost of investment	5000
Less :Income tax @ 25% on interest income(4200*25%)	1050
Less: Capital gains tax on gain on bond i.e.,(7000-5000)*30%	600
Net gain from the bond	4550

therefore yield per annum = 9.1%