Consider a newly issued bond that pays its coupon once annually, and whose coupon rate is 5%; the maturity is 20 years, and yield to maturity is 8%.
(a) Assuming there are no taxes, 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, 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 tax treatment.
(c) What is the after-tax holding period return on the bond?