Question
In: Accounting
Henry is planning to purchase a Treasury bond with a coupon rate of 2.05% and face...
Henry is planning to purchase a Treasury bond with a coupon rate of 2.05% and face value of $100. The maturity date of the bond is 15 May 2033. (a) If Henry purchased this bond on 7 May 2018, what is his purchase price (rounded to four decimal places)? Assume a yield rate of 2.31% p.a. compounded half-yearly.
(a) If Henry purchased this bond on 7 May 2018, what is his purchase price (rounded to four decimal places)? Assume a yield rate of 2.31% p.a. compounded half-yearly.
a. 97.79
b. 97.6960
c. 96.6707
d. 97.6952
(b) If Henry purchased this bond on 7 May 2018, what is his purchase price (rounded to four decimal places)? Assume a yield rate of 2.31% p.a. compounded half-yearly. Henry needs to pay 23.5% on coupon payment as tax payment and tax are paid immediately.
a. 91.3804
b. 91.3796
c. 91.6423
d. 90.5959
(c) If Henry purchased this bond on 7 May 2018, what is his purchase price (rounded to four decimal places)? Assume a yield rate of 2.31% p.a. compounded half-yearly. Henry needs to pay 23.5% on coupon payment and capital gain as tax payment. Assume that all tax payments are paid immediately.
a. 74.7368
b. 88.7183
c. 89.6585
d. 97.6799
Solutions
Expert Solution
| Coupon rate =2.05% | ||||||
| FV= $100 | ||||||
| Maturity of years =15 years(i.e, from 7 may 2018 to 15 may 2033) | ||||||
| Yield rate = 2.31% | ||||||
| Since interest is payable semi annually each period is equal to 6 months in a span of 15 years there are 30 periods . | ||||||
| Coupon Amt each period = 100*2.05%*6/12= 1.025 | ||||||
| Actual return from the bond =2.31% | ||||||
| Actual return per period =1.155% | ||||||
| (i) period | cash flows | PVIFA\PVIF @1.155% | PV of cah inflows | |||
| 1 yr -30 yr | 1.025 | 25.2325 | 25.8633 | |||
| 30 yr | 100 | 0.7085 | 70.85 | |||
| 96.7133 | ||||||
| (ii) period | cash flows less tax on coupon | PVIFA\PVIF @1.155% | PV of cah inflows | |||
| 1 yr -30 yr | 0.784125(1.025-1.025*23.5%) | 25.2325 | 19.7854 | |||
| 30 yr | 100 | 0.7085 | 70.85 | |||
| 90.6354 | ||||||
| (iii) period | cash flows less tax on coupon & capital gain | PVIFA\PVIF @1.155% | PV of cah inflows | |||
| 1 yr -30 yr | 0.784125(1.025-1.025*23.5%) | 25.2325 | 19.7854 | |||
| 30 yr | 97.7993* | 0.7085 | 69.2908 | |||
| 89.0762 | ||||||
| * capital gain =100-90.6354=9.3646 | ||||||
| Tax on capital gain =903646*23.5%=2.20068 | ||||||
| Maturity value =100-2.20068=97.7993 | ||||||
| ** Answer difference is due to Rounding offf | ||||||
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