(40%)could you PL help me with the coupon bond calculation

[fresh]

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.

Edited February 28, 2015 by fresh

[mathematic]

Your qustion is confusing. Also did Christine sell the bond after she got the dividend? If so she could use her loss as a deduction.

[fresh]

Christine holds the bond till the dividend date, and she doesnt sell it out on that date.

 

my Q is why on the dividend paid date, Christine actually paid twice 20 % ?

[mathematic]

The 20% to the seller sems to be part of the purchase price, not a tax.

[fresh]

The 20% to the seller sems to be part of the purchase price, not a tax.

yes, you are right.

i don't understand why they think the buyer pays twice 20% regardless of tax or cost ?

they say it is the way of how an accountant views it.

[fresh]

hope an experienced accountant / others who could figure it out could explain it to me. thank u very much !