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**

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