Final answer:
The tax on the $300 interest payment from a 6 percent $10,000 bond bought at a discount, for someone in the 20 percent income tax bracket, would be $60. If the market interest rate rises to 9 percent, the bond's value would decrease, and you would expect to pay less than its face value.
Step-by-step explanation:
You purchased a 6 percent $10,000 bond for $9,180 and paid an additional $156 in accrued interest, resulting in a total investment of $9,336. After receiving a $300 interest payment, you are required to pay taxes on this income. Being in the 20 percent income tax bracket, the tax owed on the interest payment is calculated by multiplying the interest received by your tax rate. Therefore, you would owe 20% of $300, which equals $60 in taxes on the interest payment.
When considering the purchase of a bond such as the local water company's $10,000 bond at a 6 percent interest rate, the current market interest rate greatly affects the price you would be willing to pay. If the market rate has risen to 9 percent and you are buying the bond one year before its maturity, you would expect to pay less than the face value of the bond, because the bond's fixed interest payments are less attractive when compared to the current higher rates available elsewhere.
To calculate the price you would be willing to pay for this bond, we need to discount the bond's expected payments (the final interest payment plus the principal repayment of $10,000) back to their present value at the current market rate of 9%. If a similar investment yields $964 for a future value of $1,080 at a 12% rate, then using a similar approach, we discount the bond's expected payments at a 9% rate to find the maximum price you would be willing to pay for the water company bond.