Question

Pelzer Printing Inc. has bonds outstanding with 9 years left to maturity. The bonds have an 9% 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 $910.30. The capital gains yield last year was -8.97%.

What is the yield to maturity? Round your answer to two decimal places.
   %

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.) Round your answer to two decimal places.
   %

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.) Round your answer to two decimal places.
   %

Answer 1

What is the yield to maturity?

Using Financial Calculator (or similar excel function RATE())

N=9, FV=1000, PMT=9%*1000=90,PV=-910.3; Compute I/Y

We get I/Y=10.5945%= 10.59%

(Note, we assumed that bond pays coupon annually)

For the coming year, what is the expected current yield?

Current yield = (Annual Coupon)/(Current Price) = 90/910.3 = 9.8868% = 9.89%

For the coming year, what is the expected capital gains yield?

Expected Total Return (YTM) = Expected Current Yield - Expected Capital Gains Yield

Implies, Expected Capital Gains Yield = YTM - Expected Current Yield = 10.59% - 9.89% = 0.70%