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

Current market price of bond = $1,050

Face value of bond = $1,000

Coupon rate = 6%

Coupon payment = Face value * Coupon rate = $1,000 * 0.06 = $60

Calculate the current yield -

Current yield = Coupon payment/Current market price

Current yield = $60/$1,050 = 0.0571 or 5.71%

As we know that -

YTM = Current yield + capital gains yield

5.35% = 5.71% + capital gains yield

Capital gains yield = 5.35% - 5.71% = -0.36%

The capital gains yield is -0.36%.

Hence, the correct answer is the option (a).