On 15 September 2020 you plan to buy a 6% p.a. Treasury bond maturing on 15 September 2026.
a. How much would you pay to earn 7% p.a. on your transaction? Ignore taxation considerations.
b. How much would you pay to earn a net return of 7% p.a. on your transaction, allowing for tax on interest only of 30%? In this instance, assume tax on interest is paid immediately.
c. How much would you pay to earn a net return of 7% p.a. on your transaction, allowing for tax on interest and capital gains of 30%? In answering this question, you should assume that the tax on interest and capital gains is deferred by twelve months.
d. Allowing for tax on interest and capital gains of 30%, what would your net annual yield be if you paid $97.447 for the bond? Again, assume that the tax on interest and capital gains is deferred by twelve months.
Present your answers to the above questions in a spreadsheet, giving each solution on a separate sheet (labelled ‘Part a’, ‘Part b’, ‘Part c’ and ‘Part
d’). Your spreadsheet should be clearly labelled and easy to understand. Make sure you identify what the “inputs” and “outputs” are. Note that all the interest rates given in this question are j2 rates.
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