On 15 September 2020 you plan to buy a 6% p.a. Treasury bond maturing on 15 September 2026….

QUESTION [5 marks] On 15 September 2020 you plan to buy a 6% p.a. Treasury bond maturing on 15 September 2026.

a. [1/2 mark] How much would you pay to earn 7% p.a. on your transac-tion? Ignore taxation considerations. b. [1 mark] 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.1/4 marks] 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. [2 marks] Allowing for tax on interest and capital gains of 30%, what would your net annual yield be if you paid 897.117 for the bond? Again, assume that the tax on interest and capital gains is deferred Iw twelve mont hs.

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