Ch 7 Wk 5 - Bond EAR = 1 .054 2 1 2 + -=5.47% k AT...

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Ch 7, week 5 (week 5 on outline) solutions (done in week 5) 2. (a) Peter Poor Taxable Income = $25,000 t f = 16% t p = 6.05% (Ontario) t sp = 0% DTC = 6.4125% t c (dividend) = [(1.25)(.16).1667]+[(1.25)(.0605) -0.064125](1+0) .0448 or 4.48% t c = t c (bond) = .16(1+0) + 0.0605(1+0) = .2205 or 22.05% Dividend EAR = 1 .25 25 1 4 + - =4.06% Bond EAR = 1 .054 2 1 2 + - =5.47% k AT (dividend)= 4.06%(1 - .0448) = 3.878% k AT (bond)= 5.47%(1 - .2205) = 4.266% Therefore, Mr. Poor is better off with the Canada Bond. (b) Wendy Wealthy Taxable Income = $150,000 t f = 29% t p = 11.16% t sp = 56% t c (dividend) = [(1.25)(.29)-.1667]+[(1.25)(.1116) -0.064125](1+.56) = .3134 or 31.34% t c (bond)=.29(1+0) + 0.1116(1+.56) .4641 or 46.41% Dividend EAR = 1 .25 25 1 4 + - = 4.06%
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Unformatted text preview: Bond EAR = 1 .054 2 1 2 + -=5.47% k AT (dividend) = 4.06% (1 - .3134) = 2.788% k AT (bond) = 5.47% (1 - .4641) = 2.933% Therefore, Ms. Wealthy is also better off with the Canada Bond. 3. (a) PV 950 FV 1000 n 10 PMT 25 %i 3.089% per 6 months YTM = 2 X 3.089 = 6.178% EAR = (1.0389) 2- 1 = 6.273% (b) The coupon is taxed at 44%. The after-tax coupon is = $14 semi-annually. The capital gain of $1000 - $950 = $50 is taxable. Capital gains tax = (.50)($50)(.44) = $11.00. Proceed after taxes = $1000 - 11.00 = $989.00. PV 950 FV 989 n 10 PMT 14 %i 1.8512% semi-annually YTM = 2 X 1.8512 = 3.702% EAR = (1.018512) 2- 1 = 3.74%...
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This note was uploaded on 10/14/2011 for the course ADMS 3541 taught by Professor Staff during the Winter '10 term at York University.

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Ch 7 Wk 5 - Bond EAR = 1 .054 2 1 2 + -=5.47% k AT...

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