CURRENT YIELD, CAPITAL GAINS YIELD, AND YIELD TO MATURITY Pelzer Printing Inc. h
ID: 2810096 • Letter: C
Question
CURRENT YIELD, CAPITAL GAINS YIELD, AND YIELD TO MATURITY Pelzer Printing Inc. has bonds outstanding with 10 years left to maturity. The bonds have a 9% annual coupon rate and were issued 1 year ago at their par value of $1,000. However, due to changes in interest rates, the bond's market price has fallen to $950.70. The capital gains yield last year was-4.93%. a. What is the yield to maturity? Do not round intermediate calculations. Round your answer to two decimal places. 9.73 b. For the coming year, what is the expected current yield? (Hint: Refer to footnote 7 for the definition of the current yield and to Table 7.1.) Do not round intermediate calculations. Round your answer to two decimal places. 9.47 Ø96 For the coming year, what is the expected capital gains yield? (Hint: Refer to footnote 7 for the definition of the current yield and to Table 7.1.) Do not round intermediate calculations. Round your answer to two decimal places. 9.73Explanation / Answer
a) Calculation of YTM
YTM = (Interest per annum + ((redemption price-current market price)/years left to maturity)/((redemption price*.4+current market price*.6)
= 90+((1000-950.70)/10)/(1000*.4+950.70*.6))
= (90+4.93)/970.42
= 94.93/970.42
= .0978
= 9.78%
* An alternative way is to take (redemption price+current market price)/2 in denominator. The above equation is said to be more accurate.
b) Calculation of Capital Gain Yield
Investor's total return comprises of 2 elements-capital gain/loss (change in market price) and coupon payment.
Capital Gain Yield = (current market price - Face value)/Face value
= (950.70-1000)/1000
= -49.3/1000
=-.0493
= -4.93