Bond life (years)
Current yield
Coupon rate
New yield (1 yr later)
Solution
You buy an eight-year bond that has a 6% current
yield and a 6% coupon (paid annually). In one year,
promised yields to maturity have risen to 7%. What is
your holding-period return?
Coupon rate
Bond price
Coupon period 182 days
Days since last coupon
Solution
Cash price –$
A bond with a coupon rate of 7% makes semiannual coupon
payments on January 15 and July 15 of each year. The Wall Street
Journal reports the ask price for the bond on January 30 at
100.125. What is the invoice price of the bond? The coupon
period has 182 days.
Coupon rate
Coupon paid annually
Maturity (years)
YTM
Income tax rate
Capital gain tax rate
Coupon reinvestment rate
Solution
a. Year end YTM
b. Constant yield price (2) $1,000.00
c. After tax HPR 0.00%
A newly issued bond pays its coupons once a year. Its coupon rate is 5%, its
maturity is 20 years, and its yield to maturity is 8%.
a. Find the holding-period return for a one-year investment period if the bond is
selling at a yield to maturity of 7% by the end of the year.
b. If you sell the bond after one year when its yield is 7%, what taxes will you owe if
the tax rate on interest income is 40% and the tax rate on capital gains income is
30%? The bond is subject to original-issue discount (OID) tax treatment.
c. What is the after-tax holding-period return on the bond?
d. Find the realized compound yield before taxes for a two-year holding period,
assuming that (i) you sell the bond after two years, (ii) the bond yield is 7% at the
end of the second year, and (iii) the coupon can be reinvested for one year at a 3%
interest rate.
e. Use the tax rates in part (b) to compute the after-tax two-year realized compound
yield. Remember to take account of OID tax rules.
e. Coupon in first year $0.00
Tax on coupon $0.00