Question

In: Finance

A bond offers a coupon rate of 7%, paid annually, and has a maturity of 10...

A bond offers a coupon rate of 7%, paid annually, and has a maturity of 10 years. The current market yield is 9%. If market conditions remain unchanged, what should be the Capital Gains Yield of the bond?

Enter your answer as a percentage, without the percentage sign ('%'), and rounded to 2 decimals. Use the minus sign ('-') if the yield is negative.

Expert Solution

Information provided:

Par value= future value= $1,000

Coupon rate= 7%

Coupon payment= 0.07*1,000= $70

Time= 10 years

Current market yield= 9%

Current yield is calculated using the below formula:

Current Yield= Annual interest/Current price

0.09= $70/ Current price

Current price= $70/ 0.09

= $777.7778 $777.78.

Capital gains yield is calculated using the below formula:

Capital Gains Yield= Current price-original price/Original price*100

= $777.78 - $1,000/ $1,000*100

= -0.2222*100

= -22.22.

In case of any query, kindly comment on the solution

jeff jeffy answered 9 months ago

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