Bond P is a premium bond with a coupon rate of 9 percent. Bond D is a discount b
ID: 2739810 • Letter: B
Question
Bond P is a premium bond with a coupon rate of 9 percent. Bond D is a discount bond with a coupon rate of 5 percent. Both bonds make annual payments, have a YTM of 7 percent, and have five years to maturity.
Requirement 1: What is the current yield for bond P? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) Current yield %
Requirement 2: What is the current yield for bond D? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) Current yield %
Requirement 3: If interest rates remain unchanged, what is the expected capital gains yield over the next year for bond P? (Do not round intermediate calculations. Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places (e.g., 32.16).) Capital gains yield % Requirement
4: If interest rates remain unchanged, what is the expected capital gains yield over the next year for bond D? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) Capital gains yield %
Explanation / Answer
Let the Par Value of Bond P and Bond D = $ 1000
Requirement 1)
Current Price for Bond P = 1000 * 9 % * Cumulative Present value (P.V.) Factor for 5 Years @ 7 % + 1000 * P.V. Factor for Fifth Year @ 7 %
= 90 * 4.100 + 1000 * 0.713
= $ 1082
Current Yield for Bond P = 90 / 1082 = 0.0832 i.e., 8.32 %.
Requirement 2)
Current Price for Bond D = 1000 * 5 % * Cumulative Present value (P.V.) Factor for 5 Years @ 7 % + 1000 * P.V. Factor for Fifth Year @ 7 %
= 50 * 4.100 + 1000 * 0.713
= $ 918
Current Yield for Bond D = 50 / 918 = 0.0545 i.e., 5.45 %.
Requirement 3)
Current Price for Bond P = $ 1082
Price of Bond P over next year = 1000 * 9 % * Cumulative Present value (P.V.) Factor for 4 Years @ 7 % + 1000 * P.V. Factor for Fourth Year @ 7 %
= 90 * 3.387 + 1000 * 0.763
= $ 1067.83
The expected capital gains yield over the next year for Bond P = (1067.83 - 1082 ) / 1082 = (-) 0.0131 i.e., (-) 1.31 %.
Requirement 4)
Current Price for Bond D = $ 918
Price of Bond D over next year = 1000 * 5 % * Cumulative Present value (P.V.) Factor for 4 Years @ 7 % + 1000 * P.V. Factor for Fourth Year @ 7 %
= 50 * 3.387 + 1000 * 0.763
= $ 932.35
The expected capital gains yield over the next year for Bond D = (932.35 - 918 ) / 918 = 0.0156 i.e., 1.56 %.
Conclusion:-
1) The current yield for Bond P 8.32 % 2) The current yield for Bond D 5.45 % 3) The expected capital gains yield over the next year for Bond P (-) 1.31 % 4) The expected capital gains yield over the next year for Bond D 1.56 %