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Question 9. A bond offers a coupon rate of 4%, paid annually, and has a maturity...

Question 9. A bond offers a coupon rate of 4%, paid annually, and has a maturity of 5 years. The current market yield is 9%. If market conditions remain unchanged, what should be the Capital Gains Yield of the bond?

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Answer #1

First we need to calculate the price of the bond, assuming the face value is 1000:

Next we need to calculate the current yield:

Capital gains yield+current yield = YTM

9% = 4.97% - Capital gains yield

Capital gains yield = 4.034%

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