Assignment 3

2027 Words9 Pages
FINS 2624 Portfolio Management Tutorial 4 – Group Presentation After-Tax Yield to Maturity (Yip S3) – Discussion Questions A. Define the after-tax yield to maturity of a bond The after-tax YTM is the annualised discount rate that equates the present value of all the after-tax cash flows of a bond, to its settlement price (on the assumption that the bond is held to maturity). The after-tax YTM allows the investor to compare the after-tax returns of different investments and compare the after-tax returns of bonds with different coupon rates B. An Investor whose marginal tax rate is 15% would like advice on the choice between a Low Coupon (LC) bond and a High Coupon (HC) bond with the following attributes ➢ LC: 2%…show more content…
C. An Investor whose marginal tax rate is 15% ranks bonds solely on their after-tax yields. Thus he would invest in the High Coupon bond if and only if the bond offered at least the same after-tax yield as the Low Coupon bond i) Compute the highest price he is willing to pay for the high coupon bond. Why won’t he pay a cent more? Why do you accept any price at or below? [pic] Because the Low Coupon Bond has a higher ATYTM of 4.320% compared to 4.118% of

More about Assignment 3

Open Document