What is the annual capital gains yield expected over the next year for a 15 year...

What is the annual capital gains yield expected over the next year for a 15 year bond with 9% coupon rate paying the coupons every six months and selling at $1,082 (enter answer as a percentage)?

Expert Solution

We need to find the YTM of the bond which is the done as shown below using irr formula

Bond (Annual payment)
Years	0	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15	16	17	18	19	20	21	22	23	24	25	26	27	28	29	30
Price	1082
Coupon payment		45	45	45	45	45	45	45	45	45	45	45	45	45	45	45	45	45	45	45	45	45	45	45	45	45	45	45	45	45	45
Par value																															1000

Total cashflows	-1082	45	45	45	45	45	45	45	45	45	45	45	45	45	45	45	45	45	45	45	45	45	45	45	45	45	45	45	45	45	1045

IRR	4.024%

YTM=2*IRR (semi annual bonds)	8.05%

Using this YTM we need to find the price of the bond after 1 year as below; ( total 28 terms as 1 year already completed)

Bond (Annual payment)
Years	0	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15	16	17	18	19	20	21	22	23	24	25	26	27	28

Coupon payment		45	45	45	45	45	45	45	45	45	45	45	45	45	45	45	45	45	45	45	45	45	45	45	45	45	45	45	45
Par value																													1000

Total cashflows	-1082	45	45	45	45	45	45	45	45	45	45	45	45	45	45	45	45	45	45	45	45	45	45	45	45	45	45	45	45

IRR	4.024%
Price/NPV	1079.03

Annualized capital gain =(price after 1 year-price initial)/price initial

=(1079.03-1082)/1082 = -.27%

jeff jeffy answered 2 years ago

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