A Company May Call a Bond If

A company may call a bond if

A) interest rates have risen
B) interest rates have fallen
C) the company's dividend is increased
D) the company's dividend is decreased
PROBLEMS
1) A bond matures in 2020 and has an annual coupon of 3.65 percent, payable on January 1 and July 1. The current price of the $1,000 bond is $978. On February 1, you purchase $10,000 face amount, and your broker charges a $25 commission. How much must you remit for the purchase?
2) You own a $10,000 bond that pays interest of 5.6 percent annually. If you are in the 30 percent federal income tax bracket, what is the annual tax owed if the bond is (a) in your regular personal account or (b) in your traditional retirement account (IRA) ?
3) A $1,000 zero coupon bond matures in five years and sells for $784 to yield 5 percent. The accrued interest for the first year is $39. You are in the 30 percent federal income tax bracket. What is tax owed in the interest if the bond is (a) in your regular personal account or (b) in your Roth retirement account (IRA) ?
SOLUTIONS TO PROBLEMS
1) Since the bond pays $365 a year ($10,000 x 0.0365) , the accrued interest owed is $31 (31 days x $365/365) . The total that has to be remitted is
$9,780 + 25 + 31 = $9,836.
(This problem does not consider any time between the purchase and settlement date which may alter the accrued interest owed.)
2) Problem 2 and 3 offer an opportunity to review retirement accounts. The tax on the interest in the regular account is
($10,000 x 0.056) (0.3) = $168.
There is no tax on the current interest payment in the IRA. The tax will be levied when the funds are distributed.
3) The tax on the interest earned (but not received) in the regular account is $39 x 0.3 = $11.70. There is no tax obligation for the Roth account. Unlike the traditional IRA, the initial contribution to the Roth IRA was not tax-deductible. Accrued interest and withdrawals are not subject to federal income taxation.