Question

ABSA Ltd bonds mature in 8 years and have a yield to maturity of 12.52 percent. The par value of the bonds is R826. The bonds have a 9.8 percent coupon rate and pay interest on a quarterly basis.

Required:

1. Find the current price of the bond.

2. Find the current yield of the bond.

3. Find the capital gains yield or loss.

Answer 1

1. we can use financial calculator for calculation of current price of the bond with below keystrokes.

interest is paid on a quarterly basis. so, bond's maturity, yield to maturity and coupon payment will also be on quarterly basis.

N = maturity in no. of quarters = 8*4 = 32; I/Y = quarterly yield to maturity = 12.52%/4 = 3.13%; FV = par value = 826; PMT = quarterly coupon payment = 826*9.8%/4 = 20.237 > CPT = compute > PV = current price of the bond = 713.48

the current price of the bond is 713.48.

2. current yield of the bond = annual coupon payment/current price of the bond = (826*9.8%)/713.48 = 80.948/713.48 = 0.1135 or 11.35%

the current yield of the bond is 11.35%.

3. capital gains yield = (par value/current price of the bond) - 1 = (826/713.48) - 1 = 1.1577 - 1 = 0.1577 or 15.77%

the capital gains yield is 15.77%.