A STRIP is purchased for $800 to mature at $1,000 in four years. For the first year, the investor must pay taxes on the economic accrual of

Question

Quizplus · Accepted Answer

The economic accrual for the first year is calculated as (1000*0.07) - (1000*0.03) = $64. Therefore, the taxes to be paid will be (0.30*64) = $19.20. This leaves us with a net amount of $44.80. Now, the tax to be paid on this net amount can be calculated as (0.40*44.80) = $17.92. Therefore, in the first year, the investor must pay a total of ($19.20 + $17.92) = $37.12. Rounding up to two decimal places, the answer would be $45.92 (Option C).

A STRIP Is Purchased for $800 to Mature at $1,000