Question

if a U.S. corporate bond is selling at a premium $1050 has a YTM of 5.35% and pays a coupon of 6%, what is the capital gains yield?
a. -0.36%
b. 0.36%
c. -0.65%
d. 0.65%
e. -0.18%

Answer 1

Suppose the face value of the corporate bond is $1000

As per the question the bond pays a coupon of 6%

Then the coupon amount is = $1000 x 6% = $60

The US cooperate bond’s is selling price at a premium of $1050

Current Yield (CY) of the bond = Coupon amount / selling price x 100 = 60/1050 x 100= 5.714%

Yield to Maturity (YTM) = 5.35%

Yield to Maturity (YTM) = Current Yield (CY) of the bond + Capital Gain Yields (CGY) of the bond

So Capital Gain Yields (CGY) of the bond = Yield to Maturity (YTM) - Current Yield (CY) of the bond

So Capital Gain Yields (CGY) of the bond = 5.35% - 5.714 = - 0.364 or Approximate -0.36

So Capital Gain Yields (CGY) of the bond is -0.36%

Answer: Option A -0.36%