Bond P is a premium bond with a coupon rate of 12 percent. Bond D has a coupon r
ID: 2733604 • Letter: B
Question
Bond P is a premium bond with a coupon rate of 12 percent. Bond D has a coupon rate of 7 percent and is currently selling at a discount. Both bonds make annual payments, have a YTM of 9 percent, and have seven 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.)
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.)
Bond P is a premium bond with a coupon rate of 12 percent. Bond D has a coupon rate of 7 percent and is currently selling at a discount. Both bonds make annual payments, have a YTM of 9 percent, and have seven years to maturity.
Explanation / Answer
Current yield of Bond P:
Assume bonds having face value of $1000,
Price of the bond should be calculated to calculate current yield and capital gains yield
The current price of Bond P in one year is:
P0= $120(PVIFA9%,5) + $1,000(PVIF9%,5) = $1,116.69
P1= $120(PVIFA9%,4) + $1,000(PVIF9%,4) =$1,097.19
Current yield = $120 / $1,116.69 = .1075 or 10.75%
The capital gains yield is:
Capital gains yield = (New price – Original price) / Original price
Capital gains yield of Bond P:
Capital gains yield = ($1,097.19 – 1,111.69) / $1,116.69 = –.0175 or –1.75%
Current yield of Bond D:
The current price of Bond D and the price of Bond D in one year is:D:
P0= $70(PVIFA9%,5) + $1,000(PVIF9%,5) = $887.27
P1= $70(PVIFA9%,4) + $1,000(PVIF9%,4) = $934.78
Current yield = $70 / $887.27 = .0788 or 7.89%
Capital gains yield of Bond D:
Capital gains yield = ($934.78– 887.27) / $887.27 = +.0535 or +5.35%.