Question

Chavez Industries, has an outstanding bond that has a $1000 face value and a 6.4% coupon rate. Interest is paid semi-annually. The bond has 7 years remaining until it matures. Today the interest rate on similar risk bonds is 5.7% and it is expected to remain at this level for many years in the future. Compute the following: A). The bond’s current price B). The bond’s price one year from today C). The current yield the bond will generate this year D). The capital gains yield the bond will generate this year E).The total yield the bond will generate this year F)The bond's yield to maturity

Answer 1

As per rules I am answering the first 4 subparts of the question

1: Using financial calculator

Input: FV= 1000 ; PMT = 6.4%*1000/2 = 32

N = 7*2 = 14

I/Y = 5.7/2 = 2.85

Solve for PV as -1,039.94

Current Price= $1039.94

2: Using financial calculator

Input: FV= 1000 ; PMT = 6.4%*1000/2 = 32

N = 6*2 = 12

I/Y = 5.7/2 = 2.85

Solve for PV as -1,035.15

Price after 1 year= $1035.15

3: Current yield= Annual coupon/ Price

= 32*2 / 1039.94

=6.15%

4: Capital gain yield = (Price after 1 year- current price)/ current price

= (1035.15- 1039.94)/ 1039.94

=-0.46%