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September 2005, Q10, URGENT PLZZ..

  • Thread starter anshul.mishra87
  • Start date
A

anshul.mishra87

Member
Q10. An investor purchased a bond with exactly 15 years to redemption. The bond, redeemable at par, has a gross redemption yield of 5% per annum effective. It pays coupons of 4% pa, half yearly in arrear. The investor pays tax at 25% on the coupons only.

(i) calculate the price paid for bond.


My question here is to the (i) part only. While calculating the price, why a tax of 25% has not been considered, as it is clearly given in the question that investor pays 25% tax on coupons.

as per solution given, the equation-- A= 4*a_15(2) +100v^15.

My question here, why not 4(1-.25)*A_15(2)+100v^15 ???

im getting P=79.63
whereas according to solution P= 90.1335.

Regard
Ansh
 
The investor is looking at a gross redemption yield of 5%. That means you ignore tax. It's easy to miss, but important.

Presumably the question goes on to ask you about the net yield and this wasn't just put in to throw you off..
 
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