Bond P is a premium bond with a coupon rate of 8.3 percent. Bond D is a discount
ID: 2706596 • Letter: B
Question
Bond P is a premium bond with a coupon rate of 8.3 percent. Bond D is a discount bond with a coupon rate of 4.3 percent. Both bonds make annual payments, have a YTM of 6.3 percent, and have eight 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
Current price of Bond P:
PP= ($1000/(1.0638))+($83 x cumulative present value factor of 6.3% for 8years)
= $613.39+$509.35
= $1122.74
Current yield of Bond P = $83/$1122.74 = 0.0739 or 7.39%
Current price of Bond D:
PD =($1000/(1.0638))+($43 x cumulative present value factor of 6.3% for 8years)
= $613.39+$263.88
= $877.27
Current yield of Bond D = $43/$877.27 = 0.049 or 4.90%
Price of Bond P next year:
PP=($1000/(1.0637))+($83 x cumulative present value factor of 6.3% for 7years)
= $652.03+$458.43
= $1110.46
Capital gains yield of Bond P = ($1110.46-$1122.74)/$1122.74 = -0.011 or -1.1%
Price of Bond D next year
PD=($1000/(1.0637))+($43 x cumulative present value factor of 6.3% for 7years)
= $652.03+$237.50
= $889.53
Capital gains yield of Bond D = ($889.53-$877.27)/$877.27 = 0.014 or 1.40%