ZuoTi.Pro
Question

You pay $550 to buy a bond that has 10 years to maturity. The bond has...

You pay $550 to buy a bond that has 10 years to maturity. The bond has a coupon value of $1,000 and a coupon rate of 4%. Inflation is running at3% per year.

When the bond matures you will have to pay a 15% capital gains tax on the difference between your purchase price and the coupon value

a)What is the IRR for your cash flow in nominal terms?

b)What is the IRR after adjustment for inflation?

business   finance   
0 0
Add a comment Improve this question Transcribed image text
Next > < Previous
Sort answers by oldest

Homework Answers

Answer #1

Answer (a):

IRR of cash flow in nominal terms = 11.36%

Workings:

Answer (b):

IRR after adjustment for inflation = 8.12%

Working:

0 0
Add a comment
Know the answer?
Add Answer to:
You pay $550 to buy a bond that has 10 years to maturity. The bond has...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions

  • You are planning to buy a bond and are considering 2 options. Your one requirement is...

    You are planning to buy a bond and are considering 2 options. Your one requirement is that you need to buy the lower price bond. Your desired nominal yield after tax is 4%, convertible semi-annually. The details of the 2 bonds under consideration are as follows: A corporate bond with a 10,000 par value, a 4 year term, and a coupon rate of 6% payable semi-annually. The tax rate applicable on corporate bond coupon payments is 30%. The bond will...

  • Suppose that you buy a TIPS (inflation-indexed) bond with a 2-year maturity and a coupon of...

    Suppose that you buy a TIPS (inflation-indexed) bond with a 2-year maturity and a coupon of 4.7% paid annually. Assume you buy the bond at its face value of $1,000, and the inflation rate is 9.05% in each year. a. What will be your cash flow in year 1? b. What will be your cash flow in year 2? B.

  • Suppose you buy a TIPS bond with 1 year until maturity and an annual coupon of...

    Suppose you buy a TIPS bond with 1 year until maturity and an annual coupon of 5.8%. If you buy the bond at face value and the inflation rate is 4.7%, then what will be your nominal return during the year?

  • Suppose that you buy a TIPS (inflation-indexed) bond with a 2-year maturity and a coupon of...

    Suppose that you buy a TIPS (inflation-indexed) bond with a 2-year maturity and a coupon of 5.3% paid annually. Assume you buy the bond at its face value of $1,000, and the inflation rate is 9.95% in each year. a. What will be your cash flow in year 1? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Cash flow T b. What will be your cash flow in year 2? (Do not round intermediate calculations. Round...

  • set 1 1.The market price of a semi-annual pay bond is $963.48. It has 14.00 years...

    set 1 1.The market price of a semi-annual pay bond is $963.48. It has 14.00 years to maturity and a coupon rate of 8.00%. Par value is $1,000. What is the yield to maturity? 2.A tax-exempt municipal bond with a coupon rate of 9.00% has a market price of 98.64% of par. The bond matures in 14.00 years and pays semi-annually. Assume an investor has a 28.00% marginal tax rate. The investor would prefer otherwise identical taxable bond if it's...

  • 1a) You just learned from your sister that you can buy a $1,000 par value bond...

    1a) You just learned from your sister that you can buy a $1,000 par value bond for $800. The coupon rate is ten percent (paid annually), and there are ten years left until the bond matures. You should purchase the bond if your require twelve percent return on bonds with this similar risk level. True/False? 1b) A corporate bond with ten years to maturity has an annual coupon rate of six percent. The bond today is selling for $1,000. With...

  • Bond X is noncallable and has 20 years to maturity, a 10% annual coupon, and a...

    Bond X is noncallable and has 20 years to maturity, a 10% annual coupon, and a $1,000 par value. Your required return on Bond X is 9%; if you buy it, you plan to hold it for 5 years. You (and the market) have expectations that in 5 years, the yield to maturity on a 15-year bond with similar risk will be 8%. How much should you be willing to pay for Bond X today? (Hint: You will need to...

  • You buy a bond for $997 that has a coupon rate of 6.30% and a maturity...

    You buy a bond for $997 that has a coupon rate of 6.30% and a maturity of 6-years. A year later, the bond price is $1,192. (Assume a face value of $1,000 and annual coupon payments.) a. What is the new yield to maturity on the bond? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) b. What is your rate of return over the year? (Do not round intermediate calculations. Enter your...

  • You buy a bond for $985 that has a coupon rate of 5.50% and a maturity...

    You buy a bond for $985 that has a coupon rate of 5.50% and a maturity of 8-years. A year later, the bond price is $1,160. (Assume a face value of $1,000 and annual coupon payments.) a. What is the new yield to maturity on the bond? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) b. What is your rate of return over the year? (Do not round intermediate calculations. Enter your...

  • Question #8 (20 Points): If you buy municipal bond (tax free) that cost $1,000 and will...

    Question #8 (20 Points): If you buy municipal bond (tax free) that cost $1,000 and will pay a 4.5% coupon for the next 20 years (so the maturity date is in 20 years). At maturity the bond returns the original $1,000. If there is a 2% annual inflation, what real rate of return will you receive?

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT