CT1-IFOA sept., 2005

Hi tutors
In the attached qus., in part (i)
why (1-t1) is not used although it is said that the investor pay 25% tax on coupons only?
Please rply asap.
Thanks

 

The (1-t1) is not being taken account of because we are using a GROSS redemption yield and not a net yield of return.

 

Ohh yes, ohk. Thanks

 

Please explain one more thing, if the investor pays both the income tax and capital gain tax and we are given the gross redemption yield, then we should not take account of both the taxes ie. income tax and capital gain tax? Then the eq. of value should be like this:
P=Da-n + Rvⁿ
(ignoring the effect of t1 and t2)?

 

Yes. A gross redemption yield is defined as the rate of return earned on an investment before any tax is paid. So it is used in conjunction with gross (ie pre-tax) cashflows.

They're really just trying to test whether you know what "gross" means, and have provided information on tax rates to throw you off the scent (and because I think you need the tax information later in the question).