Question

Winslow Enterprises’ 8-year, 6.25 percent, semi-annual coupon bonds have a par value of $2,500 and currently trade at $2,300.

a)     What is the yield to maturity on these bonds?

b)     What is the current yield and capital gains yield on these bonds?

c)     Assuming the yield to maturity remains unchanged, at what price do you expect these bonds to trade one year from now?

d)     Explain briefly why the bond’s price changes the way it does.

Answer 1

a.

Calculating yield to maturity,

Using TVM Calculation,

I =[FV = 2,500, PV = -2,300, PMT = 78.13, N = 16]

I = 7.60%

b.

Current yield = 156.25/2,300

Current yield = 6.79%

Capital gain yield = 0.076 - 0.0679

Capital gain yield = 0.81%

c.

Calculating bond Price,

Using TVM Calculation,

PV =[FV = 2,500, PMT = 78.13, I = 0.076/2, N = 14]

PV = $2,319.42

d.

As yield to Maturity is less than coupon bond, so as time to Maturity decreases bond price will move to par value at maturity