Question
In: Finance
Henry is planning to purchase a Treasury bond with a coupon rate of 4.86% and face...
Henry is planning to purchase a Treasury bond with a coupon rate of 4.86% and face value of $100. The maturity date of the bond is 15 May 2033.
(a) If Henry purchased this bond on 6 May 2018, what is his purchase price (rounded to four decimal places)? Assume a yield rate of 4.35% p.a. compounded half-yearly.
(b) If Henry purchased this bond on 6 May 2018, what is his purchase price (rounded to four decimal places)? Assume a yield rate of 4.35% p.a. compounded half-yearly. Henry needs to pay 27.9% on coupon payment as tax payment and tax are paid immediately. \
(c) If Henry purchased this bond on 6 May 2018, what is his purchase price (rounded to four decimal places)? Assume a yield rate of 4.35% p.a. compounded half-yearly. Henry needs to pay 27.9% on coupon payment and capital gain as tax payment. Assume that all tax payments are paid immediately.
Solutions
Expert Solution
b) Calculation of purchase price of bond:
After tax coupon rate = 4.86%(1-0.279) = 3.5046%
Periodic coupon = ($100*3.5046%)/2 = $1.75230
Periodic discount rate = 4.35%/2 = 2.175%
Periods to maturity = (2033-2018)*2 = 30
Purchase price = Coupon*PVAF(2.175%,30) + Face value*PVIF(2.175%,30)
=$1.75230 * 0.04570 + $100 * 0.5244
=$52.5201
Formula Sheet:
jeff jeffy answered 1 year agoRelated Solutions
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