Reference no: EM132764574

Show that the net annual yield

Investor A bought at inception a bond of nominal amount of £1.000 bearing interest of 6% per year payable half-yearly in arrears. The bond was to be redeemed at par ten years after the date of purchase. The price paid by A was such that A would realise a net yield on the investment of 10% per year (if A had held the bond until it was redeemed).

Five years after purchasing the bond (and immediately after receiving the interest then due) A sold the bond to B, paying capital gains tax on the excess of the selling price over the original price. The bond was held by B until it was redeemed.

1. (a) Show that the net annual yield obtained by A over the completed transaction is 9.7059% assuming that the purchase price paid by B were such that B obtained a net yield on the investment of 10% per year (note that due to rounding the results might slightly differ).
2. (b) Show that the net annual yield obtained by B on the investment is 9.4934%,assuming that the purchase price paid by B were such that A obtained a net yield over the completed transaction of 10% per year (note that due to rounding the results might slightly differ).