Assignment 3

2027 Words Jan 14th, 2013 9 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%
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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?

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Because the Low Coupon Bond has a higher ATYTM of 4.320% compared to 4.118% of

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