Question

Current yield, capital gains yield, and yield to maturity

Hooper Printing Inc. has bonds outstanding with 9 years left to maturity. The bonds have an 9% annual coupon rate and were issued 1 year ago at their par value of $1,000. However, due to changes in interest rates, the bond's market price has fallen to $910.30. The capital gains yield last year was - 8.97%.

1. What is the yield to maturity? Round your answer to two decimal places.
      %
   
2. For the coming year, what is the expected current yield? (Hint: Refer to Footnote 7 for the definition of the current yield and to Table 7.1.) Round your answer to two decimal places.
      %
   
   For the coming year, what is the expected capital gains yield? (Hint: Refer to Footnote 7 for the definition of the current yield and to Table 7.1.) Round your answer to two decimal places.
      %

Answer 1

Answer a.

Par Value = $1,000
Current Price = $910.30

Annual Coupon Rate = 9.00%
Annual Coupon = 9.00% * $1,000
Annual Coupon = $90

Time to Maturity = 9 years

Let Annual YTM be i%

$910.30 = $90 * PVIFA(i%, 9) + $1,000 * PVIF(i%, 9)

Using financial calculator:
N = 9
PV = -910.30
PMT = 90
FV = 1000

I = 10.59%

Annual YTM = 10.59%

Answer b.

Current Yield = Annual Coupon / Current Price
Current Yield = $90 / $910.30
Current Yield = 0.0989 or 9.89%

Answer c.

Capital Gain Yield = Yield to Maturity - Current Yield
Capital Gain Yield = 10.59% - 9.89%
Capital Gain Yield = 0.70%