Asked by DreamHome Furnishings on Apr 24, 2024
Verified
You buy a 10-year $1,000 par value 4% annual-payment coupon bond priced to yield 6%. You do not sell the bond at year-end. If you are in a 15% tax bracket, at year-end you will owe taxes on this investment equal to ________.
A) $9.10
B) $4.25
C) $7.68
D) $5.20
Par Value
The face value of a bond or stock, which is the amount paid back to the holder at maturity for bonds, or a base value for calculating dividend payments for stocks.
Coupon Bond
A debt security that pays the holder a fixed interest rate, or coupon, periodically until the maturity date, when the principal is repaid.
Tax Bracket
A tax bracket is a range of incomes taxed at a specific rate under a progressive tax system, where tax rates increase as income increases.
- Understand the concepts related to coupon bonds, including par value, coupon rate, and taxable income from these investments.
- Understand and calculate the tax implications for earnings from different types of bonds, including zero-coupon and coupon-bearing bonds.
Verified Answer
ZK
Zybrea KnightMay 02, 2024
Final Answer :
C
Explanation :
P10 = 40 
+ 
= $852.80
P9 = 40
+ 
= $863.97
Calculator entries for this year's price are N = 10, I/Y = 6, PMT = 40, FV = 1,000, CPT PV → 852.80
Calculator entries for next year's price are N = 9, I/Y = 6, PMT = 40, FV = 1,000, CPT PV → 863.97
Taxes owed are ($863.97 − $852.80 + $40)(.15) = $7.68
+ = $852.80P9 = 40
+ = $863.97Calculator entries for this year's price are N = 10, I/Y = 6, PMT = 40, FV = 1,000, CPT PV → 852.80
Calculator entries for next year's price are N = 9, I/Y = 6, PMT = 40, FV = 1,000, CPT PV → 863.97
Taxes owed are ($863.97 − $852.80 + $40)(.15) = $7.68
Learning Objectives
- Understand the concepts related to coupon bonds, including par value, coupon rate, and taxable income from these investments.
- Understand and calculate the tax implications for earnings from different types of bonds, including zero-coupon and coupon-bearing bonds.