Question

Pelzer Printing Inc. has bonds outstanding with 9 years left to maturity. The bonds have a 8% annual coupon rate and were issued 1 year ago at their par value of $1,000. However, due to changes in interest rates, the bond's market price has fallen to $910.40. The capital gains yield last year was -8.96%.

a. What is the yield to maturity? Do not round intermediate calculations. Round your answer to two decimal places.

b. For the coming year, what is the expected current yield? (Hint: Refer to footnote 7 for the definition of the current yield and to Table 7.1.) Do not round intermediate calculations. Round your answer to two decimal places.

c. For the coming year, what is the expected capital gains yield? (Hint: Refer to footnote 7 for the definition of the current yield and to Table 7.1.) Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

a. The YTM is calculated using =rate(nper,pmt,pv,fv) in excel where nper =9,pmt = 8%*1000 =80, pv=910, fv=100

The YTM =rate(9,80,-910.40,1000) = 9.53%

So, Yield to maturity = 9.53%

b. Current Yield = Coupon payment/Current Price = 80/910.40 = 0.0879 = 8.79%

c. We need to calculate the price next year:

The price next year =pv(rate,nper,pmt,fv) =PV(0.0953,8,80,1000) = $917.13

Capital gains next year = 917.13-910.40 = $6.73

Capital gains yield = 6.73/910.40 * 100 = +0.74%