Question

A 10-year corporate bond has an annual coupon payment of 5.3%. The bond is currently selling at par ($1,000). Which of the following statement is not correct? Why?

The bond’s capital gain yield is 5.3%.

The bond’s yield to maturity is 5.3%.

The bond’s current yield is 5.3%.

If the bond’s yield to maturity remains constant, the bond’s price will remain at par.

Answer 1

The right answer choice is “The bond’s capital gain yield is 5.3%”

Here, the Bond is selling at Par, therefore, the Yield to maturity of the Bond will be equal to the Coupon rate of the Bond (ie, 5.30%)

-The Current Yield = (Annual coupon amount / Selling Price) x 100

= [($1,000 x 5.30%) / $1,000] x 100

= ($53 / $1,000) x 10

= 5.30%

The Yield to maturity of the Bond = Current Yield + Capital Gain Yield

5.30% = 5.30% + Capital Gain Yield

Capital Gain Yield = 5.30% - 5.30%

Capital Gain Yield = 0.00%

Therefore, the Capital Gain Yield is 0.00% and not 5.30%