Sign up  |  Log in

Calculating market yield for bonds

Pre-tax                              After-tax            

Year                                   Year     

0            -95                       0            -95

1            4                           1            3.32

2            4                           2            3.32

3            4                           3            3.32

4            104                      4            103.32

IRR        5.4%                    IRR        4.7%

With tax rate at 17%, I have calculated after-tax coupon payments to be 4 x 0.83 = 3.32. The second table gives me after-tax market yield of the bond at 4.7% whereas the first table gives me 5.4% x 0.83 = 4.5%. Which method is correct and why?

Thanks

Schweser's upgraded learning platform and refreshed content are exactly what you need to prepare to pass the CFA® Program exam. Save 10% when you order a Premium Package for a limited time.

I think the second method is more accurate because it deals with after-tax cash-flows (although both answers are pretty close).

How much tax did you pay on the (100 -95)??? enlightened

“Mmmmmm, something…” - H. Simpson

Thanks.