CISI International Certificate in Wealth & Investment Management ICWIM Question # 26 Topic 3 Discussion
ICWIM Exam Topic 3 Question 26 Discussion:
Question #: 26
Topic #: 3
When redemption yields are quoted on a net-of-tax basis, this is so that:
A.
The default risk can be taken into account
B.
A risk of inflation rising unexpectedly and its effect on the real value of the bond's coupon payments and redemption payment can be taken into account
C.
An investor can reinvest the interest payment at the same net redemption yield
D.
A direct comparison can be made of the net return to the investor
Quoting yields on a net-of-tax basis allows investors to compare the returns they will effectively receive after accounting for taxation.
This is particularly useful in tax planning and for comparing taxable vs. non-taxable instruments.
Elimination of Other Options:
A: Default risk is unrelated to tax-adjusted yields.
B: Inflation adjustments do not necessitate net-of-tax yield quotations.
C: Reinvestment risk does not directly relate to tax basis comparisons.
References:
ICWIM Module 5: Details on yield calculations and tax implications.
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