On February 1, 2013, Janet buys a bond for $10,000 that makes coupon payments of $600 after each of the following two years and returns its principal of $10,000 at the end of the second year.In other words, it is a standard coupon bond with a 6 percent annual interest rate making payments once each year.
On February 1, 2014, Janet receives her first coupon payment of $600.At that time, the market interest rate on bonds like hers has fallen to 4 percent.She sells her bond to Justin at that time, for a price equal to the present value of the bond's payments.
a.How much does Justin pay Janet for the bond?
Both Janet and Justin have tax rates of 30 percent on interest income and 20 percent on capital gains.(Note that if someone has a capital loss, you may assume that he or she can reduce taxes by the amount of the capital loss times the tax rate of 20 percent.)

b.CalculateCalculate Janet's after-tax rate of return for the past year (from Feb. 1, 2013, to Feb. 1,2014).
Janet's after-tax rate of return for the past year (from Feb.1, 2013, to Feb.1,
2014).

c.What is Justin's after-tax rate of return for the year from Feb.1, 2014, to Feb.1, 2015?
Explain and show all your work for each part.You may assume, of course, that the market works and does not malfunction.

Question

On February 1, 2013, Janet buys a bond for $10,000 that makes coupon payments of $600 after each of the following two years and returns its principal of $10,000 at the end of the second year.In other words, it is a standard coupon bond with a 6 percent annual interest rate making payments once each year.
On February 1, 2014, Janet receives her first coupon payment of $600.At that time, the market interest rate on bonds like hers has fallen to 4 percent.She sells her bond to Justin at that time, for a price equal to the present value of the bond's payments.
a.How much does Justin pay Janet for the bond?
Both Janet and Justin have tax rates of 30 percent on interest income and 20 percent on capital gains.(Note that if someone has a capital loss, you may assume that he or she can reduce taxes by the amount of the capital loss times the tax rate of 20 percent.)

b.CalculateCalculate Janet's after-tax rate of return for the past year (from Feb. 1, 2013, to Feb. 1,2014).
 Janet's after-tax rate of return for the past year (from Feb.1, 2013, to Feb.1,
2014).

c.What is Justin's after-tax rate of return for the year from Feb.1, 2014, to Feb.1, 2015?
Explain and show all your work for each part.You may assume, of course, that the market works and does not malfunction.

Quizplus · Accepted Answer

The Answer of On February 1, 2013, Janet buys a bond for $10,000 that makes coupon payments of $600 after each of the following two years and returns its principal of $10,000 at the end of the second year.In other words, it is a standard coupon bond with a 6 percent annual interest rate making payments once each year.
On February 1, 2014, Janet receives her first coupon payment of $600.At that time, the market interest rate on bonds like hers has fallen to 4 percent.She sells her bond to Justin at that time, for a price equal to the present value of the bond's payments.
a.How much does Justin pay Janet for the bond?
Both Janet and Justin have tax rates of 30 percent on interest income and 20 percent on capital gains.(Note that if someone has a capital loss, you may assume that he or she can reduce taxes by the amount of the capital loss times the tax rate of 20 percent.)

b.CalculateCalculate Janet's after-tax rate of return for the past year (from Feb. 1, 2013, to Feb. 1,2014).
 Janet's after-tax rate of return for the past year (from Feb.1, 2013, to Feb.1,
2014).

c.What is Justin's after-tax rate of return for the year from Feb.1, 2014, to Feb.1, 2015?
Explain and show all your work for each part.You may assume, of course, that the market works and does not malfunction.

On February 1, 2013, Janet Buys a Bond for $10,000