Logo
Home Study Material Contact Search
AI Chat FREE
  1. business
  2. accounting
  3. margaret has just bought a 14-year treasury bond p

Margaret has just bought a 14-year Treasury bond paying coupon semi-annually at j2 = 5%...

50.1K

Verified Solution

Question

Accounting

Margaret has just bought a 14-year Treasury bond paying coupon semi-annually at j2 = 5% p.a. The bond matures at par.

a. Find Margaret's purchase price (per $100 face value, rounded to 3 decimal places) of this Treasury bond, allowing for a 30% tax on interest only, to give a yield of j2 = 3.2% p.a. (net). Draw a cash flow diagram that models this scenario to accompany your answer.

b. Find Margaret's purchase price (per $100 face value, rounded to 3 decimal places) of this Treasury bond, allowing for a 30% tax on interest only. The tax on interest is paid one year later (e.g., for the coupon payment at t = 0.5 year, the tax payment will be paid at t = 1.5 years.), to give a yield of j2 = 3.2% p.a. (net). Draw a cash flow diagram that models this scenario to accompany your answer.

c. Justify the difference in your answers to parts a. and b. above.

d. If Margaret paid $95.268 per $100 face value for the bond, and was exempt from tax, what yield was associated with her purchase? Use linear interpolation to find this yield and express your yield as a j2 rate, to one decimal place.

Answer & Explanation Solved by verified expert
Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:
  • Unlimited Question Access with detailed Answers
  • Zin AI - 3 Million Words
  • 10 Dall-E 3 Images
  • 20 Plot Generations
  • Conversation with Dialogue Memory
  • No Ads, Ever!
  • Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!
Become a Member

Other questions asked by students