Bond P is a premium bond with an 8.7 percent coupon. Bond D is a 4.7 percent cou
ID: 2629371 • Letter: B
Question
Bond P is a premium bond with an 8.7 percent coupon. Bond D is a 4.7 percent coupon bond currently selling at a discount. Both bonds make annual payments, have a YTM of 6.7 percent, and have twelve years to maturity.
What is the current yield for bond P?
What is the current yield for bond D?
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?
Explanation / Answer
Bond P is a premium bond with an 8.7 percent coupon. Bond D is a 4.7 percent coupon bond currently selling at a discount. Both bonds make annual payments, have a YTM of 6.7 percent, and have twelve years to maturity.
What is the current yield for bond P?
Present Value of Bond P = pv(rate,nper,pmt,fv)
Present Value of Bond P = = pv(6.7%,12,87,1000)
Present Value of Bond P == $ 1161.42
current yield for bond P = 87/1161.42
current yield for bond P = 7.49%
What is the current yield for bond D?
Present Value of Bond D = pv(rate,nper,pmt,fv)
Present Value of Bond D = = pv(6.7%,12,47,1000)
Present Value of Bond D == $ 838.58
current yield for bond D = 47/838.58
current yield for bond D = 5.60%
If interest rates remain unchanged, what is the expected capital gains yield over the next year for bond P?
Value of Bond P after 1 year = pv(rate,nper,pmt,fv)
Value of Bond P after 1 year = pv(6.7%,11,87,1000)
Value of Bond P after 1 year = $ 1152.24
Capital Gain/Loss = -1161.42 + 1152.24
Capital Gain = -9.18
Capital Gain Yield = Capital Gain/PV of Bond today
Capital Gain Yield = -9.18/1161.42
Capital Gain Yield = - 0.79%
If interest rates remain unchanged, what is the expected capital gains yield over the next year for bond D?
Value of Bond D after 1 year = pv(rate,nper,pmt,fv)
Value of Bond D after 1 year = pv(6.7%,11,47,1000)
Value of Bond D after 1 year = $ 847.76
Capital Gain/Loss = -838.58 + 847.76
Capital Gain = 9.18
Capital Gain Yield = Capital Gain/PV of Bond today
Capital Gain Yield = 9.18/838.58
Capital Gain Yield = 1.10%