Question

Analyze the 20-year, 8% coupon rate (annual payment), $1,000 par value bond. The bond currently sells for $1,318. What’s the bond’s current yield, and capital gain yield? 6.07%, 0.71% 6.07%, -0.71% 8%, 1.43% 8%, -1.43%

Answer 1

Bond’s Current Yield

Bond’s Current Yield = [Annual Coupon Amount / Current Selling price of the Bond] x 100

= [($1,000 x 8%) / $1,318] x 100

= [$80 / $1,318] x 100

= 6.07%

Bond’s Capital Gain Yield

The Yield to maturity of (YTM) of the Bond is calculated using financial calculator as follows (Normally, the YTM is calculated either using EXCEL Functions or by using Financial Calculator)

Variables	Financial Calculator Keys	Figure
Face Value [$1,000]	FV	1,000
Coupon Amount [$1,000 x 8%]	PMT	80
Yield to Maturity [YTM]	1/Y	?
Time to Maturity [10 Years]	N	24
Bond Price [-$1,318]	PV	-1,318

We need to set the above figures into the financial calculator to find out the Yield to Maturity of the Bond. After entering the above keys in the financial calculator, we get the yield to maturity (YTM) on the bond = 5.36%

Therefore, the Capital Gain Yield of the Bond = Yield to Maturity of the Bond - Current Yield

= 5.36% - 6.07%

= -0.71%

Hence, the Bond’s Current Yield = 6.07%

Bond’s Capital Gain Yield = -0.71% (Negative)