Bond P is a premium Bond with a coupon rate of 8.2 percent. Bond D is a discount
ID: 3142605 • Letter: B
Question
Bond P is a premium Bond with a coupon rate of 8.2 percent. Bond D is a discount Bond with a coupon rate of 4.2 percent. Both Bonds make annual payments, have a YTM of 6.2 percent, a par value of $1,000, and have seven years to maturity. What is the current yield for Bond P? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Current yield % What is the current yield for Bond D? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Current yield % If interest rates remain unchanged, what is the expected capital gains yield over the next year for Bond P? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Capital gains yield % If interest rates remain unchanged, what is the expected capital gains yield over the next year for Bond D? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Capital gains yield %
Explanation / Answer
we need to find the price of bond.
the current price of ond p and price of bond p in one year is
p : p0 =$120(PVIFA9%..5)+$1000(PVIFA9%..5) = $ 1116.69
p1 = $120(PVIFA9%..4)+$1000(PVIFA9%..4 ) = $1097.19
current yield = $120/$1116.69 = 0.1075 or 10.75%
the capital gains yield is :
capital gains yield = (new price - original price )/original price
capital gains yield = ($1097.19 - $1116.69 = - 0.0175 or -1.75%
D : p0 =$60(PVIFA9%..5)+$1000(PVIFA9%..5) = $ 883.31
p1 = $60(PVIFA9%..4)+$1000(PVIFA9%..4 ) = $902.81
current yield = $60/ $883.81 = 0.679 or 6.79%
capital gains yield = ($902.81 - 883.81)/$883.81 = +0.0221 or 2.21%