Question: A bondholder is subject to a tax of 50% on interest payments at the time interest is received, and a tax (or credit) of 25% on capital gains (or losses) when they are realized. Assume that the capital gain (or loss) on the bond is the difference between the purchase price and the sale price (or redemption amount if held to maturity), and the full amount of each coupon is regarded as interest. For each of the cases in Example, find the bonds purchase price so that the stated yield is the after-tax yield (based on the bond being held to maturity).
Example: A 10% bond with face amount 10000 matures 4 years after issue. Construct the amortization schedule for the bond over its term for nominal annual yield rates of
(a) 8% ,
(b) 10% and
(c) 12%.