Concept explainers
(a)
To calculate:
The
Introduction:
Return is a profit on an investment. So the rate of return is a profit over a period of time of investment. It expressed as a percentage of the original investment.
Answer to Problem 31PS
The rate of return for holding one year is
Explanation of Solution
Given:
Coupon on bond
Maturity of bond
Yield to maturity of bond
Face value of bond
Bond price is
For starting year price is
For price for the next year is
The return on holding period is
(b)
To calculate:
The tax on income from bond and
Introduction:
Tax to be levied on income of coupon bond as per regular rate of tax and capital gain shall be levied on change in price if there is change in yield to maturity from constant yield to maturity.
Answer to Problem 31PS
Total tax on income is
Explanation of Solution
Given:
Coupon on bond
Maturity of bond
Yield to maturity of bond
Face value of bond
Tax rate on income is
Tax on capital gain is
For calculation income from bond if yield to maturity is
Price for initial year is
Price for first year is
Implicit interest for the first year is
Tax on bond is
Tax on capital gain is as follows:
So total tax on income is
(c)
To calculate:
The rate of return after tax for a one year investment if the bond is selling at a yield to maturity of
Introduction:
Return is a profit on an investment. So the rate of return is a profit over a period of time of investment. It expressed as a percentage of the original investment.
Answer to Problem 31PS
Total return on income after tax for holding period is
Explanation of Solution
Given:
Coupon on bond
Total tax on income is
End of period value is
Initial year price is
Holding period return is
(d)
To calculate:
The realized compound yield before taxes for two-years holding period where bond is selling after two years and having
Introduction:
Return is a profit on an investment. So the rate of return is a profit over a period of time of investment. It expressed as a percentage of the original investment.
Answer to Problem 31PS
The realized compound yield is
Explanation of Solution
Here, the formula to calculate and given are added followed by a detailed explanation / working out the complete problem
Initial price of bond
Price on end of second year under
We invest coupon amount for one-year so total income including coupon amount in end of second year is
So, total fund after two year including coupon income is
So, realized yield is
(e)
To calculate:
The realized compound yield after taxes for two-years where bond is selling after two years and having
Introduction:
Return is a profit on an investment. So the rate of return is a profit over a period of time of investment. It expressed as a percentage of the original investment.
Answer to Problem 31PS
The realized compound yield after tax is
Explanation of Solution
Here, the formula to calculate and given are added followed by a detailed explanation / working out the complete problem
Price for second year is
So implicit interest for second year is
Total income after tax in first year after considering tax on imlicit interest is
We invested it for one-year then total proceed after tax is
So total proceeds up to the second year is
Price of bond in second year is $798.82
Tax on imputed interest in second year is
Coupon amount after tax in second year is
Capital gain tax on second year sale price
So total cash flow in second year is
Realized coupon yield in second year is
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Chapter 14 Solutions
INVESTMENTS(LL)W/CONNECT
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