Question

Ezzell Enterprises' noncallable bonds currently sell for $879.00. They have a 5-year maturity, semi-annual coupon rate of 12.00%, and a par value of $1000. What is the bond's capital gain or loss yield?

Round your answer to two decimal places. For example, if your answer is $345.6671 round as 345.67 and if your answer is .05718 or 5.7182% round as 5.72.

13.70%

15.57%

2.00%

1.92%

13.65%

Suppose 1-year Treasury bonds yield 3.70% while 2-year T-bonds yield 4.10%. Assuming the pure expectations theory is correct, and thus the maturity risk premium for T-bonds is zero, what is the yield on a 1-year T-bond expected to be one year from now?

5.13%

4.50%

3.47%

5.45%

3.74%

Answer 1

1. Capital Gain Yield = ((Coupon Payment + [(Face Value - Current Price)/10] / (Face Value + Current Price)/2) * 2

Capital Gain Yield = ((60 + [(1000 - 879)/10] / (1000 + 879)/2) * 2

Capital Gain Yield = ((60 + 12.10] / 939.50) * 2

Capital Gain Yield = 15.35%(Rounded off to 15.57%) Option B

By using Excel IRR formula we can get exactly YTM as 15.57% as answer.

2. (1 + 2 Year Bond Rate)^2 = (1 + 1 Year Bond Rate) * (1 + Yield Rate)

(1 + 0.0410)^2 = (1 + 0.0370) * (1 + Yield Rate)

1 + Yield Rate = 1.0450

Yield Rate = 4.50% Option B