Question

Pelzer Printing Inc. has bonds outstanding with 9 years left to maturity. The bonds have an 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%. What is the yield to maturity? - For the coming year, what are the expected current and capital gains yields?

Answer 1

(a.) Calculation of YTM :

Yield to maturity can be calculated using Rate Function of Excel :

Using Financial Calculator

=RATE(nper,pmt,pv,fv)

where nper is Number of years to maturity i.e 9

pmt is Interest payment i.e 1000 * 8% =80

pv is Current Market Price

= - 910.40

Note : pv should be taken as negative.

fv is face value i.e 1000 (Assumed)

=RATE(9,80,-910.4,1000)

therefore ,Yield to maturity is 9.53%

(b.) Calculation of Current Yield

Current yield = Coupon / Current Market Price

= 80 / 910.4

= 0.08787346221 or 8.79%

Expected Capital Gain Yield = Yield to maturity - Current Yield

= 9.53% - 8.79%

= 0.74%