Bond A is a premium bond with a 9 percent coupon. Bond B is a 5 percent coupon b
ID: 2809237 • Letter: B
Question
Bond A is a premium bond with a 9 percent coupon. Bond B is a 5 percent coupon bond currently selling at a discount. Both bonds make annual payments, have a YTM of 6 percent, and have five years to maturity. The face value is $1000 for both bonds.
a) What is the current yield for Bond A? For Bond B?
b) If interest rates remain unchanged, what is the expected capital gains yield over the next year for Bond A? For Bond B?
c) Why is the capital gain yield of the premium bond different from that of the discount bond? Which bond is better in terms of yields?
d) What is the holding period return for each bond, if both bonds are held over the next year and sold at the year ned?
Explanation / Answer
ANSWER:A
Current yield
8.18%
Note 1since the premium & disount rate has not been given it is assumed that both the rates are 10 %
2. current yield
BOND A = interest amount divided by bond price
= 90/1100
=8.18%
BOND B = 50/900
=5.56%
Particulars Bond A Bond B Interest 90 (1000* 9%) 50 (1000*5%) bond selling rate(note 1) 1100 900