Question

XYZ company bonds are selling in the market for $1045 (104.50).These bonds will mature in 15 years and pay $70 in interest annually.if the bonds are purchased at the market price, what is the (a)coupon rate ,(b) current yield, (c) approximate yield to maturity and (d) capital gains yield?

Answer 1

A) Coupon rate = Coupon Amount / Face Value

= $ 70 / $ 1000

= 7% per anum

B) Cutrrent yield = Coupon amount / Current Price

= $ 70 / $ 1045

= 6.70%

C) YTM is the rate at which PV of Cash Inflows are equal to Bond Price

YTM = rate at which least +ve NPV + [ NPV at that rate / change in NPV due to inc of 1% ] *1 %

= 6% + [ 52.12 / 97.12 ] * 1%

= 6% + 0.54%

= 6.54%

Part D =

Capital gain Yield = YTM - CUrrent Yield

= 6.54% - 6.70%

= -0.16%