Molly Matters Inc. issues a split-coupon $1,500 bond that matures in seven years

Question

Molly Matters Inc. issues a split-coupon $1,500 bond that matures in seven years. Interest payments are $120 a year (8 percent) and start after three years have lapsed. The bond initially sells for a discounted price of $1,190.75. You are in the 30 percent income tax bracket and purchase the bond. What are the annual taxes owed on the interest? Round your answers to the nearest cent.

Year 1 $

Year 2 $

Year 3 $

Year 4 $

Year 5 $

Year 6 $

Year 7 $ You are in the 30 percent income tax bracket and purchase the bond in your IRA. What are the annual taxes owed on the interest? Round your answers to the nearest cent.

Year 1 $

Year 2 $

Year 3 $

Year 4 $

Year 5 $

Year 6 $

Year 7 $

please show your work.

Explanation / Answer

(a) Computation of the the annual taxes owed on the interest.We have,

Annual coupon payment after 3 years = $ 120

Capital gain at the end of 7th year = 1,500 - 1,190.75 = $ 309.25

Total income at the end of 7th year = 309.25 + 120 = $ 429.25

(b) Computation of the the annual taxes owed on the interest.We have,

We do not have to pay taxes on the interest.It is because,it is earn within the IRA.

Year Tax owed on the income($) 1 0 2 0 3 0 4 120x30% 36 5 120 x 30% 36 6 120 x 30% 36 7 429.25 x 30% 128.78

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