Question

A bond has a par value of $1,000, a time to maturity of 8 years, and a coupon rate of 8% with interest paid annually. If the current market price is $765,

a) What is the bond's yield to maturity?       

b) What is its current yield?

c) What is its approximate capital gain yield of this bond over the next year?

2. Consider the bond in #1 above. Suppose the interest fall to 10% right after the bond is purchased and stay at that level. What will be the holder's holding period yield if the bond is sold after 2 year?

Answer 1

1a). To find the ytm, we need to put the following values in the financial calculator:

INPUT	8		-765	8%*1,000=80	1,000
TVM	N	I/Y	PV	PMT	FV
OUTPUT		12.88

So, YTM = 12.88%

b). Current Yield = Annual Coupon Payment / Current Market Price = $80 / $765 = 10.46%

c). CGY = YTM - Current Yield = 12.88% - 10.46% = 2.42%

2). To find the bond price after 2 years, we need to put the following values in the financial calculator:

INPUT	6	10		8%*1,000=80	1,000
TVM	N	I/Y	PV	PMT	FV
OUTPUT			-912.89

So, Bond Price after 2 years = $912.89

HPR = [(P2 + Coupon Payments] / P0]^1/2 - 1

= [($912.89 + $80 + $80) / $765]^1/2 - 1 = [1.4025]^1/2 - 1 = 1.1843 - 1 = 0.1843, or 18.43%