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A bond has a par value of $1000, a coupon rate of 6.6% paid annually, and...

A bond has a par value of $1000, a coupon rate of 6.6% paid annually, and maturity of 17 years. If the current market price is $1,010 what is the dollar capital gain of this bond over the next year if the yield to maturity stays the same?

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Answer #1

Par value of bond = Future value of bond (FV) = $1000

No of annual coupon payments (N) =17

Annual Coupon amount (PMT) = $1,000 x 6.6% = $ 66

Price of bond (PV) = -$1010

Yield to maturity (Y) = ??

Therefore using financial calculator or Rate function in excel

Yield to maturity (Y) = 6.50%

If after one year, yield to maturity remains same, that is 6.501%

Par value of bond = Future value of bond (FV) = $1000

No of annual coupon payments (N) =16

Annual Coupon amount (PMT) = $1,000 x 6.6% = $ 66

Yield to maturity (Y) = 6.501%

Price of bond (PV) = ??

Therefore using financial calculator or PV function in excel

Price of bond (PV) = $1009.66

Therefore after one year, dollar capital gain / (loss) = price now - price 1 year back = 1009.66 - 1010 = (-$ 0.34)

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