90.2K

Verified Solution

Link Copied!

Sarah just purchased a 10-year Treasury bond with a coupon rate of j2 = 3.2% p.a. and a face value of $100 that matures at par. a. [2 marks] Calculate Sarah's purchase price for this bond. Assume that the yield rate is 12 = 3.4% p.a. Round the result to three decimal places. b. [3 marks] Sarah decides to hold this bond to maturity. She predicts that the reinvestment rate is 12 3.5% Based on your result from part a, calculate Sarah's total realised compound yield rate. Give your answer in j2 form, rounded to two decimal places. c. [5 marks | Assume this bond is subject to a 30% tax on interest and capital gain. Calculate Sarah's net yield to maturity by using the linear interpolation. It is also assumed that Sarah purchased this bond at a price of $97.80 and that all tax is paid immediately. Give your answer in j2 form, rounded to two decimal places. Hint: the lower bound is assumed to be 1.2% per half year and the upper bound is assumed to be 1.3% per half year. d. (4 marks] Given that this bond is subject to a 30% tax on interest and capital gain. Recalculate the price Sarah should pay if the net yield rate is j2 = 2.4% p.a. and all tax payments interest tax payments and capital gain tax payment) are delayed by a half year from when taxable cash flows occur. Round the result to three decimal places. Sarah just purchased a 10-year Treasury bond with a coupon rate of j2 = 3.2% p.a. and a face value of $100 that matures at par. a. [2 marks] Calculate Sarah's purchase price for this bond. Assume that the yield rate is 12 = 3.4% p.a. Round the result to three decimal places. b. [3 marks] Sarah decides to hold this bond to maturity. She predicts that the reinvestment rate is 12 3.5% Based on your result from part a, calculate Sarah's total realised compound yield rate. Give your answer in j2 form, rounded to two decimal places. c. [5 marks | Assume this bond is subject to a 30% tax on interest and capital gain. Calculate Sarah's net yield to maturity by using the linear interpolation. It is also assumed that Sarah purchased this bond at a price of $97.80 and that all tax is paid immediately. Give your answer in j2 form, rounded to two decimal places. Hint: the lower bound is assumed to be 1.2% per half year and the upper bound is assumed to be 1.3% per half year. d. (4 marks] Given that this bond is subject to a 30% tax on interest and capital gain. Recalculate the price Sarah should pay if the net yield rate is j2 = 2.4% p.a. and all tax payments interest tax payments and capital gain tax payment) are delayed by a half year from when taxable cash flows occur. Round the result to three decimal places

Answer & Explanation Solved by verified expert

See Answer