Bond P is a premium bond with a coupon rate of 8.4 percent. Bond D is a discount
ID: 2755003 • Letter: B
Question
Bond P is a premium bond with a coupon rate of 8.4 percent. Bond D is a discount bond with a coupon rate of 4.4 percent. Both bonds make annual payments, have a YTM of 6.4 percent, and have nine 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).)
Explanation / Answer
1.suppose bond p has face value of $100, coupon rate 8.4%, ytm = 6.4%, Time =9 years to maturity
present Value of BOND= INTERST* PVAF@6.4%for 9years + MATURITY VALUE* PVF@ 6.4% for 9th year
= 8.4* 6.68 + 100*.572
= $113.33
Current yield= interest/ present value of bond
= 8.4/113.33 * 100
=7.41%
2. Bond D , FV =100, INTEREST = 4.4%, YTM=6.4% time 9 years
PRESENT VALUE =4.4 *6.68 + 100* 0.572
= $86.59
CURRENT YIELD = 4.4/86.59 * 100
=5.08%