A newly issued 20-year maturity, zero-coupon bond is issued with a yield to maturity of 8%...
A newly issued 20-year maturity, zero-coupon bond is issued with a yield to maturity of 8% and face value of $1,000. If the applicable tax rate is 21% and you own 10 of these bonds, what will be your tax liabilities for the next two years?
Homework Answers
Value of Bond today = Maturity Value / (1+r)^n
= 1000 / (1+0.08)^20
= 214.55
Value of Bond in 2 yrs = Maturity Value / (1+r)^n
= 1000 / (1+0.08)^19
= 231.71
Value of Bond today = Maturity Value / (1+r)^n
= 1000 / (1+0.08)^18
= 250.25
Tax in year 1 = (Value in year 1 - Value today) * no of Bonds * Tax
= (231.71 - 214.55) * 10 * 21%
= 36.04
Tax in year 2 = (Value in year 2-Value in year 2) * no of Bonds * Tax
= (250.25 - 231.71) * 10 * 21%
= 38.93
Since no interest is paid on Zero Coupon bond. but the Capital Gain attracts tax. So Tax is paid on the Capital Gain Appretiation.
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