Question

10. Hooper Printing Inc. has bonds outstanding with 9 year left to maturity. The bonds have an 8% annual coupon rate and were issued 1 year ago at their pair value of $1,000. However, due to 2 changes in interest rates, the bond’s market price has fallen to $901.40. The capital gains yield last year was -9.86% a. What is the yield to maturity? b. For the coming year, what are the expected current capital gains yields? (Hint: Refer to footnote 7 for the definitions of the current yield and to table 7.1.) c. Will the actual realized yields be equal to the expected yields if interest rates change? If not, how will they differ?

*******PLEASE DO NOT COPY OTHER'S WORK AND NOT USE EXCEL, THANK YOU VERY MUCH!*********

Answer 1

a) Calculation of Yield to Maturity :-

Formula :-

= (Interest Value + ((F - P)/ n))/((F+P)/2)

F = Face Value = $1000

P = Current Price = $901.40

n = No. of Years to Maturity = 9 year

Interest Value = $1000 *8% = $80

Yield to Maturity = ($80 + (($1000-$901.40)/9)) / (($1000+$901.40)/2)

= ($80+(98.6/9)) / ($1901.40/2)

= ($80 + 10.956) / $950.70

= $90.956 / $950.70

= 0.09567 or 9.567%

b) Current Yield :-

= Interest Value / Current price

= $80 / $901.40

= 0.08875 or 8.875%

c) Capital Gain Yield :-

= Yield to Maturity - Current Yield

= 9.567% - 8.875%

= 0.692%