Bond P is a premium bond with a coupon rate of 9.3 percent. Bond D is a discount
ID: 2758659 • Letter: B
Question
Bond P is a premium bond with a coupon rate of 9.3 percent. Bond D is a discount bond with a coupon rate of 5.3 percent. Both bonds make annual payments, have a YTM of 7.3 percent, and have eight 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).) 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).) 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).) 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
Answer: Requirement 1:
The current price of Bond P and the price of Bond P in one year is: P:
P = $93(PVIFA 7.3%,8 ) + $1,000(PVIF 7.3%,8 ) = $1118.05
P 1 = $93(PVIFA 7.3%,7 ) + $1,000(PVIF 7.3%,7 ) = $1,106.67
Current yield = $93 / $1,118.05 =8.32%
Answer: Requirement 3:
The capital gains yield is: Capital gains yield = (New price - Original price) / Original price
Capital gains yield = ($1,106.67 - 1,118.05) / $1,118.05 = -1.02%
Answer: Requirement 2:
The current price of Bond D and the price of Bond D in one year is: D:
P = $53(PVIFA 7.3%,8 ) + $1,000(PVIF 7.3%,8 ) = $881.95
P 1 = $53(PVIFA 7.3%,7 ) + $1,000(PVIF 7.3%,7 ) = $893.33
Current yield = $53 / $881.95 = 6.01%
Answer: Requirement 4:
Capital gains yield = ($893.33 - 881.95) / $881.95 =1.29%