Anewly issued bond pays its coupons once a year. its coupon rate is 4.1%, its maturity is 15 years, and its yield to maturity is 7.1%.

a. find the holding-period return for a one-year investment period if the bond is selling at a yield to maturity of 6.1% 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 6.1%, 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.)
c. what is the after-tax holding-period return on the bond? (do not round intermediate calculations. round your answer to 2 decimal places.)
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 6.1% at the end of the second year, and (iii) the coupon can be reinvested for one year at a 2.1% interest rate. (do not round intermediate calculations. round your answer to 2 decimal places.)
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.)

a) 17.53%

b) $41 x 40% = $ 16.40

    815.25 - 728.48 = 86.77 capital gain x 30% = $ 26.03

Total: 26.03 + 16.40 = $ 42.43 income tax expense

c) (815.25 + 41 - 42.43) / 728.48 - 1 = 0.1171425 = 11.71%

d)

we recalculate the price of the bond with 13 years left to maturity

holding period return 26.94%

e)

tax expense:

(41x1.02 + 41) x 0.4 = 33.14

(841.87 - 728.48) x 0.3 = 34.02

tax expense: 67.16

after tax return:

(841.87 + 41x1.021 + 41 - 67.16) /728.48 - 1 = 0.177209379 = 17.72%

Explanation:

We need to determinate the value of the bond at yield of 7.1% and at yield of 6.1% which is the sum of the present value of the maturity and coupon payment:

Purchase price:

Coupon payment = 1,000 x 0.041 =41.00

time15 years

rate0.071

PV$371.0773

Maturity   1,000.00

time   15.00

rate  0.071

PV   357.40

PV c  $   371.0773

PV m $  357.4028

Total  $  728.4801

Selling Price

C41.00

time      14 (one-year past so maturity is more closer)

rate0.061

PV$378.7456

Maturity   1,000.00

time   14.00

rate  0.061

PV   436.50

PV c$378.7456

PV m  $436.5004

Total$815.2460

Holding period return:

return / investment - 1

(815.25 + 41) / 728.48 - 1 = 0.175387059 = 17.53%

d)

we recalculate the price of the bond with 13 years left to maturity

C41.00

time14

rate0.061

PV$378.7456

Maturity   1,000.00

time   13.00

rate  0.061

PV   463.13

PV c$378.7456

PV m  $463.1269

Total$841.8725

and redo the return, tax and after-tax return:

(841.87 + 41x1.021 + 41) /728.48 - 1 = 0.269401333

the answer would be voluntary exchange -

"the act of buyers and sellers freely and willingly engaging in market transactions. moreover, transactions are made in such a way that both the buyer and the seller are better off after the exchange than before it occurred."

hope this : )

-shy