Question

Wee Beastie Animal Farm bonds have 9 years to maturity and pay an annual coupon at the rate of 6.2 % . The face value of the bonds is $ 1,000 . The price of the bonds is $ 1,091.31 to yield 4.92 % . What is the capital gain yield on the? bonds?

The capital gain yield? is:???(Select the best choice? below.)

A. negative 0.73

B. plus 0.62 %

C. negative 0.77 %

D. negative 0.76 %

E. plus 0.68 %

Answer 1

Answer is negative 0.76%

Face Value = $1,000

Annual Coupon Rate = 6.2%
Annual Coupon = 6.2% * $1,000
Annual Coupon = $62

Time to Maturity = 9 years
Annual YTM = 4.92%

Current Price, P0 = $1,091.31

Next Year Price, P1 = $62 * PVIFA(4.92%, 8) + $1,000 * PVIF(4.92%, 8)
Next Year Price, P1 = $62 * (1 - (1/1.0492)^8) / 0.0492 + $1,000 / 1.0492^8
Next Year Price, P1 = $1,083.00

Capital Gain Yield = (P1 - P0) / P0
Capital Gain Yield = ($1,083.00 - $1,091.31) / $1,091.31
Capital Gain Yield = -0.0076
Capital Gain Yield = -0.76%