Tax Loss Carryforward & Bond price change

CFA Level I
#1
  1. Is the amount of tax loss carry forward equals the amount of net income loss or net income loss taking tax into account? e.g. a net income loss of $2000 with tax 40% = -$800. In this case, is tax loss carry forward -$2000 or -$800? 2) For a given change in yield, a higher coupon bond will experience a smaller change in price than a lower-coupon bond. Q: Anyone can explain? I tried working out the CF and found that higher coupon bond will experience a higher change in price? Thanks.
#2

The amount that is carried forward 20yrs or back 2, is the net operating loss. It’s taken out of the net operating gains in future years. In this case, the net loss is 2K. Essentially, you either deduct the op loss from the fuure op gain, or it is the same as deducting the tax loss(800) from the future taxes payable. Look at CROX 10Q in a recent quarter. They have losses, and following how it’s accounted for would help you understand a real world situation. The second part, I’m not sure if you are talking about the yield or the risk free rate changing.

#3

Higher Coupon bonds face less interest rate risk than do lower coupon bonds. When you do the calculations look at overall percentage change in the price of the bond. For example, 6% coupon bond, 10 yr maturity, 1000 FV, I/R = 5% Price = $1077.21 5% coupon bond, " " Price = $1000 Suppose interest rates change and the new market yield is 5.5% Price of 5% coupon = 962.31 (Change of 37.69 absolute dollars, but 3.77% of original P) Price of 6% coupon = 1037.69 (Change 39.52 absolute dollars, but 3.67% of original P) Hope this helps…

#4

Thanks guys.

#5

malnoll Wrote: ------------------------------------------------------- > The amount that is carried forward 20yrs or back > 2, is the net operating loss. > It’s taken out of the net operating gains in > future years. In this case, the > net loss is 2K. Essentially, you either deduct the > op loss from the fuure > op gain, or it is the same as deducting the tax > loss(800) from the future > taxes payable. Look at CROX 10Q in a recent > quarter. They have losses, > and following how it’s accounted for would help > you understand a real > world situation. > > The second part, I’m not sure if you are talking > about the yield or the > risk free rate changing. “Essentially, it is the same as deducting the tax loss(800) from the future taxes payable”. This is true only if the tax rate remains 40%. Isn’t always better to carry operating loss/gain instead of net?