Question

Bond P is a premium Bond with a coupon rate of 8.5 percent. Bond D is a discount Bond with a coupon rate of 4.5 percent. Both Bonds make annual payments, have a YTM of 6.5 percent, a par value of $1,000, and have ten years to maturity.

If interest rates remain unchanged, what is the expected capital gains yield over the next year for Bond P?

If interest rates remain unchanged, what is the expected capital gains yield over the next year for Bond D?

Answer 1

Value of a bond is given by the excel function, PV = PV(R,N,PMT,FV)

R - YTM

N - years to maturity

PMT - Coupon

FV - Par value

Coupon = Coupon rate * par value

	Term	Bond P	Bond D	Capital gain of bond P	Capital gain of bond D
P0	10	1143.78	856.22	0.93%	-1.24%
P1	9	1133.12	866.88

Capital gain = (P1-P0)/P0