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the coupon bond calculation

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the coupon bond calculation  Reply with quote  

A 5-year duration coupon bond has 8% annual rate, the par value is $100.
It's issue date is Jan 2, 2010, the dividend paid date (is it called ex-dividend date? i forget..) is Jan 1, 2011, and the tax rate is 20% for the coupon rate $8 on dividend paid date.
(note: if the buyers sell this bond before dividend paid date, he/she will avoid the 20% tax rate.)

if we hold this bond till dividend paid date Jan 1, 2011, we will get $6.4 dividend after tax.

Christine buys this coupon bond on Dec 29, 2010, she pays almost 108 and she will get approx.$6.4 dividend on the dividend paid date.

my Q is why people says she actually pays twice 20% tax ? it is 40% tax for this coupon bond dividend ?

the first 20% is paid out to the seller who sells it on Dec 29,2010, because the seller avoids the tax rate but Christine burdens the tax, and the second time is the tax rate deducted by authority on Jan 1, 2011, so it is 40%.

if that is the case, it costs 40%* $8 = $3.2 to make it 40%, but she finally will get almost $6.4 dividend instead of $4.8 and pays only 108.
$8 - $6.4 = $1.6 --> only 20% tax.

why people insist she pays twice 20% ??

who can explain it to me ? thank u very much.
Post Mon Mar 09, 2015 12:40 pm
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