Question

1. Analyze the 20-year, 8% coupon rate (Semi-annual payment), $1,000 par value bond. The bond currently sells for $1,218. What's the bond's yield to maturity?

A. 5.06%

B. 5.68%

C. 5.38%

D. 6.10%

2. Analyze the 20-year, 8% coupon rate (Semi-annual payment), $1,000 par value bond. The bond currently sells for $1,218. What's the bond's current yield, and capital gain yield? (Please show your work)

A. 6.57%, -0.47%

B. 6.07%, -0.69%

C. 6.57%, -0.47%

D. 6.07%, 0.69%

Answer 1

Ans 1) price of bond = C * (1 - (1+r/2)^(2*n))/(r/2) + FV/(1 + r/2)^(2*n)

where C is coupon payment which is equal to $40 ( 8/2 % of 1000)

FV is face value of bond = $1000

n is number of year till maturity which is = 20 years

Price of bond = $1218

while putting all the above value we will get the bond's yield to maturity equal to 6.1%.

Ans 2) Bond's current yield = yearly coupon payment / bond price.

= 80/1218 = 6.57%

Since the current bond price is more than redemption value, capital gain yield will be negative (-.47%).