Question

5. Eleven years from now the bond will have 1 year until maturity. Assume market interest rates are at 7%, the same place they were when the bond was issued. Given this:

k.What will be the bond’s price 11 years from now?

l.What will be the current yield eleven years from now?

m.What is the expected capital gains yield eleven years from now?

Answer 1

k. Bond price will be same as its face value because the interest rate is same as time of interest rates when bonds were issued. If interest rate is lower than the initial interest rate bond would have been trading at premium to its face value and at discount if interest rate is above initial interest rate.
l. Current yield is calculated by dividing the annual coupon by current price but in this cash current price is same as face value the current yield would be same as coupon rate which is 7%
m. As bond current price and face value are same there would not be any capital gain yield. Capital gain is calculated by dividing the change in price by initial price, in given situation price and face values are same the capital gain yield would be zero.