Bowman, Inc. has bonds outstanding with 7 years remaining to maturity. Suppose the bonds have an 6% annual coupon interest rate and were issued on June 15, 2015 at their par value of $1,000. Interest rates have changed since the bonds were issued and the bonds’ market price now is $910.30.
TASKS: Please -
[a] Show well-labeled calculations for Bowman, Inc.’s bond yield to maturity as of today.
[b] Show well-labeled calculations to indicate the current yield and capital gains yield for Bowman Inc.’s bond for an investor who hold the bonds until they mature.
[c] Suppose it is now June 15, 2025, and that investors in Bowman, Inc.’s bonds reinvested the coupon interest payments from Bowman, Inc. bonds at the rates shown below. Show well-labeled calculations to indicate the investor’s true yield on their Bridgewater bond investment.
- June 2018 - June 2021 = 4%
- June 2021 - June 2024 = 5%
-June 2024 - June 2025 = 6%
| a) Bond yield to maturity | |
| Par Value = FV | $1,000.00 |
| Coupon Rate | 6.00% |
| PMT | $60.00 |
| Current Price = PV | $910.30 |
| Nper | 7 |
| Yield to Maturity = Rate(7,60,-910.30,1000) | 7.71% |
| b) Current yield and capital gains | |
| Current Yield = Coupon Payment/ Current Price = $60/$910.30 | 6.59% |
| Capital Gain Yield = 7.71% - 6.59% | 1.11% |
| c) True yield | |
| Effective yield | |
| June 2018 - June 2021 = effective rate = (1+4%)^3 - 1 | 12.49% |
| June 2021 - June 2024 = effective rate = (1+5%)^3-1 | 15.76% |
| June 2024 - June 2025 = effective rate = (1+ 6%)^1 -1 | 6.00% |
| Average | 11.42% |
| True yield | 11.42% |
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