Question

Use the following information for Question 7, 8, and 9.

The HUANG Company currently has one bond issue outstanding. This bond pays a coupon rate of 8% ($80 per year) and matures in six years, and has a par value of $1,000. If you require a 20% rate of return,

1. How much would you be willing to pay for each of HUANG Company's bonds? (Assuming this is an annual bond).

a. 600.94

b. 618.22

c. 634.19

2. What is the current yield (not yield) of this bond in the first year?

a. 13.088%

2. 13.174%
3. 13.313%
4. 13.667%

3. What is the capital gain yield of this bond in the first year?

a. 6.5148%

b. 6.6875%

c. 6.7729%

Answer 1

- Face/Par Value of bond = $1000

Annual Coupon Bond = $1000*8%

= $80

No of years to maturity(n) = 6 years

Required Rate of Return(YTM) = 7%

Calculating the Market price of Bond:-

Price = $266.041 + $334.898

Price = $600.94

So,you be willing to pay for each of HUANG Company's bonds is $600.94

Q- )

Current Yield = Annual Coupon payment/Current Price = $80/$600.94

Current Yield = 13.313%

Option B

Q-) Required Rate of Return(YTM) = Current yield + Capital Gain Yield

20% = 13.313% + Capital Gain Yield

Capital Gain Yield = 6.6875%

Option B