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Tutorial 8 Solutions.pdf

# Tutorial 8 Solutions.pdf - Tutorial 8 Chapter 14 8 10 CFA-2...

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Tutorial 8 Chapter 14: 8, 10, CFA-2 Chapter 15: 2, 3, 7 Chapter 14 8. The bond price will be lower. As time passes, the bond price, which is now above par value, will approach par. 10. a. Zero coupon 8% coupon 10% coupon Current prices \$463.19 \$1,000.00 \$1,134.20 b. Price 1 year from now \$500.25 \$1,000.00 \$1,124.94 Price increase \$ 37.06 \$ 0.00 \$ 9.26 Coupon income \$ 0.00 \$ 80.00 \$100.00 Pretax income \$ 37.06 \$ 80.00 \$ 90.74 Pretax rate of return 8.00% 8.00% 8.00% Taxes* \$ 11.12 \$ 24.00 \$ 28.15 After-tax income \$ 25.94 \$ 56.00 \$ 62.59 After-tax rate of return 5.60% 5.60% 5.52% c. Price 1 year from now \$543.93 \$1,065.15 \$1,195.46 Price increase \$ 80.74 \$ 65.15 \$ 61.26 Coupon income \$ 0.00 \$ 80.00 \$100.00 Pretax income \$ 80.74 \$145.15 \$161.26 Pretax rate of return 17.43% 14.52% 14.22% Taxes† \$ 19.86 \$ 37.03 \$ 42.25 After-tax income \$ 60.88 \$108.12 \$119.01 After-tax rate of return 13.14% 10.81% 10.49% * In computing taxes, we assume that the 10% coupon bond was issued at par and that the decrease in price when the bond is sold at year-end is treated as a capital loss and therefore is not treated as an offset to ordinary income. † In computing taxes for the zero coupon bond, \$37.06 is taxed as ordinary income (see part (b); the remainder of the price increase is taxed as a capital gain.

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