Bond P is a premium bond with a coupon rate of 8 percent. Bond D has a coupon ra

Question

Bond P is a premium bond with a coupon rate of 8 percent. Bond D has a coupon rate of 3 percent and is currently selling at a discount. Both bonds make annual payments, have a YTM of 5 percent, and have five 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.) Current yield Bond P Bond D 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.) Capital gains yield Bond P Bond D

Explanation / Answer

First, we need to calculate bond price using PV function

N = 5, I/Y = 5%, PMT = 8% x 1000 = 80 for P and 30 for D, FV = 1000

=> Compute PV = 1,129.88 for Bond P and 913.41 for Bond D.

Current Yield (CY) = Coupon / Price = 80 / 1129.88 = 7.08% for P and 30 / 913.41 = 3.28% for D

Capital Gains Yield (CGY) = YTM - CY = 5% - CY

Bond P Bond D Coupon 8.00% 3.00% Price $1,129.88 $913.41 CY 7.08% 3.28% CGY -2.08% 1.72%

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