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Chapter 12, example 3 from slides, part 2: why do we ignore capital gains tax here? (in respect to the 2 redemption payments)

+1 vote
asked Nov 12, 2016 in BUS 2016H - Financial Mathematics by Tayla (220 points)

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In part 2 we no longer pay capital gains tax on the 2 redemption payments why is this the case?

1 Answer

+2 votes
answered Nov 14, 2016 by Sure (640 points)
selected Nov 14, 2016 by simon_rigby
Best answer

Its an omission. The capital gains tax should only not be charged on the selling price S but not on N_{1} and N_{2}. Try to effect capital gains tax at t=4 and t = 5 and see if you get a different answer. Sometimes when typing solutions I have typos but final answers will include the correct thing. The answer when you do the right thing should be 0.0576788 = 5.76788%