Question

A bond has a par value of $1,000, a time to maturity of 20 years, and a coupon rate of 7.10% with interest paid annually. If the current market price is $710, what will be the approximate capital gain of this bond over the next year if its yield to maturity remains unchanged? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Capital gain $_______

Answer 1

ANSWER

STEP 1 : CALCULATION OF YIELD TO MATURITY

Variable to be inserted on Calculator :

• Present Value {PV} = -710
• Future Value {FV} = 1000
• n = 20
• PMT = 71 {ie 1000 * 0.071}

YTM = 10.66%

STEP 2 : CALCULATION OF PRICE AFTER 1 YEAR

Price1 = { Coupon * PVAF(10.66%,19yrs) } + { Maturity Value * PVF(10.66%,19th year) }

= { $71 * 8.01181040955 } + { $1000 * 0.1459410 }

= { $568.838539078 } { 145.94101022 }

= $ 714.779549

STEP 3 : CALCULATION OF CAPITAL GAIN OVER NERT YEAR

Capital Gain = Price at Year1 (-) Current Price

= $ 714.779549 - $ 710

= $ 4.78