Answer to Question #296028 in Financial Math for hibajene

Question

(A) A fixed interest security of nominal amount K100,000 will be repaid at 110% after15 years. The security bears a coupon of 9% p.a. payable annually in arrears.

(i) On the issue date the security is purchased for K80,000 by an investor who is liable to income tax at 40% and to capital gains tax at 30%. Find the investor’s net (meaning after tax) effective redemption yield p.a. for the transaction.

(ii) The investor wishes to secure an after-tax redemption yield of 9% p.a. Determine how much the investor should pay for the security.

(B) Investors often allow for risk by requiring a higher yield to lend money to a borrower who is thought to be at higher risk of not repaying some or all of the interest and capital. Explain the consequences for companies or governments trying to raise money in the capital markets.