Question

# Bond P is a premium bond with a coupon rate of 8 percent. Bond D has...

 Bond P is a premium bond with a coupon rate of 8 percent. Bond D has a coupon rate of 3 percent and is currently selling at a discount. Both bonds make annual payments, have a YTM of 5 percent, and have seven years to maturity.

 a. What is the current yield for Bond P and Bond D? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) b. If interest rates remain unchanged, what is the expected capital gains yield over the next year for Bond P and Bond D? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

a) We will first calculate the Present value of bond P and D,

We can calculate the Pv in excel,

 Bond P Future Value 1000 pmt 80 interest 5% No of years 7 Present Value 1173.59 (=PV(5%,7,-80,1000,0))

Pv of bond P = \$1,173.59

 Bond D Future Value 1000 pmt 30 interest 5% No of years 7 Present Value 884.27 (=PV(5%,7,-30,1000,0))

PV of bond D = \$884.27

Current yield = Coupon rate / Price

Current yield for Bond P = 80/1173,59 = 6.82%

Current yield for Bond D = 30/884.27 = 3.39%

b) Capital gains yield = YTM - current yield

YTM = 5%

Capital gains yield for Bond P = 5% - 6.82% = -1.82%

Capital gains yield for Bond D = 5% - 3.39% = 1.61%