Bond yields One year ago Clark Company issued a 10-year, 13% semiannual coupon b
ID: 2771306 • Letter: B
Question
Bond yields
One year ago Clark Company issued a 10-year, 13% semiannual coupon bond at its par value of $1,000. Currently, the bond can be called in 6 years at a price of $1,065, and it now sells for $1,270.
A) What is the bond's nominal yield to maturity? Round your answer to two decimal places.
B) What is the bond's nominal yield to call? Round your answer to two decimal places.
C) What is the current yield? (Hint: Refer to Footnote 7 for the definition of the current yield and to Table 7.1.) Round your answer to two decimal places.
D) What is the expected capital gains (or loss) yield for the coming year? Round your answer to two decimal places.
Explanation / Answer
A) Nominal yield to maturity PV = 1000 (Issue price), FV = 1000, Coupon is 13% semiannual = $65 (PMT), period to maturity is 10 years = 20 semiannual
From yield formula PV (1000) = Coupon1/(1+r) + ...+ Coupon 20/(1+r)^20 + 1000/(1+r)^20
Solving the above r = 6.50% is the answer
(B) Yield to call, in the above calculation, only period will change to 6 years (12 coupon periods) and FV will be 1065
Solving this, Rate = 4.05% is the answer
C) Current yield
PV = 1270, FV = 1000, Coupon is 13% semiannual = $65 (PMT), period to maturity is 9 years = 18 semiannual
From yield formula 1270 = Coupon1/(1+r) + ...+ Coupon 18/(1+r)^18 + 1000/(1+r)^18
Solving the above r = 4.31% is the answer
D) Capital gain in coming year: for this we need to get FV for next year given the current price (PV) is 1270, rate is 4.31% which is current yield FV = 1249.03
SO capital gain will be 1249.03 - 1000 = $249.03 for next year