A bond offers a coupon rate of 4%, paid annually, and has a maturity of 5...

A bond offers a coupon rate of 4%, paid annually, and has a maturity of 5 years. The current market yield is 9%. If market conditions remain unchanged, what should be the Capital Gains Yield of the bond?

Solutions

Expert Solution

Step-1:Calculation of current price of bond

Current price	=	=-pv(rate,nper,pmt,fv)
	=	$ 805.52

Where,
rate	Market yield		9%
nper	Number of period		5
pmt	Coupon payment		$ 40
fv	Face value		$ 1,000

Step-2:Calculation of current yield

Current yield	=	Annual coupon	/	Current price
	=	$ 40	/	$ 805.52
	=	4.97%

Step-3:Calculation of Capital gain Yield

Capital Gain Yield	=	Market yield	-	Current yield
	=	9%	-	4.97%
	=	4.03%

Capital gain yield should be 4.03%

jeff jeffy answered 4 months ago

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