Question

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? |

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.) |

Answer #1

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%**

**If you have any doubts please let me know in the
comments. Please give a positive rating if the answer is helpful to
you. Thanks.**

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