Answer:
After tax cash flow $44,281.60
After tax cash flow ($30,518.40)
After tax cash flow $8856.32
Explanation:
In the first case when the interest income of $74,800 ,the after-tax cash flow would be taxed as follows"
before tax cash flow $74,800.00
tax at 40.8%*$74,800 ($30,518.40)
After tax cash flow $44,281.60
If the entire interest income is re-invested after tax cash flow is computed thus:
before tax cash flow $0
tax at 40.8%*$74,800 ($30,518.40)
After tax cash flow ($30,518.40)
If the entire interest income represents the original issue discount,which is the difference between the face value and the issue price,after tax cash flow is computed thus:
The OID is taxable as if it accrues over the duration of the investment(bonds),hence a portion of the OID would be assessed to tax each year (assume the duration of investment is 5 years)
Annual portion of OID=$74,800/5
before tax cash flow $14,960
.00
tax at 40.8%*$74,800 ($6103.68
)
After tax cash flow $8856.32
After tax cash flow $44,281.60
