Question

Bond P is a premium bond with a coupon rate of 10 percent. Bond D has a coupon rate of 5 percent and is currently selling at a discount. Both bonds make annual payments, have a YTM of 7 percent, and have nine years to maturity.

  

What is the current yield for bond P and bond D? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

	Current yield
Bond P	%
Bond D	%

If interest rates remain unchanged, what is the expected capital gains yield over the next year for bond P and bond D? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

	Capital gains yield
Bond P	%
Bond D	%

Answer 1

Bond P
Number of periods N=9

Interest rate I/Y=7%

Periodic payment PMT=1000*10% = 100

Future value FV=1000

Present value PV(PMT, I/Y, N, FV) = PV (100, 7%, 9, 1000)

= 1195.46
After 1 year
N=8, I/Y=7, PMT=100, FV=1000, PV=1179.14

Change in price=1179.14 - 1195.46 = - 16.32

Current yield=(100/1195.46) = 8.36%
Cap Gains yield = (-16.32/1195.46) = - 1.47%
Negative sign shows that this is capital loss yield

Similarly for Bond D
N=9, I/Y=7, PMT=50, FV=1000, PV=869.70
1 year later:
N=8, I/Y=7, PMT=50, FV=1000, PV=880.57

Change in price= 880.57 - 869.70 = 10.87

Current Yield = 50*100/869.70 = 5.75%
Cap Gain yield = 10.87*100/869.70 = 1.25%