Question

1. MJI Corporation bonds mature in 6 years and have a yield to maturity of 8.5 percent. The par value of the bonds is $1,000. The bonds have a 10 percent coupon rate and pay interest on a semi-annual basis. Assuming there are no changes to interest rates during the course of the year, what are the current yield and capital gains on the bonds for this year?

Answer 1

Current yield = Annual coupon/Bond's price

FV = 1,000

Annual coupon = 1,000 * 0.10 = 100

Semi-annual coupon, cpn = 100/2 = 50

n = 6 * 2 = 12 semi-annual coupon payments

r = 8.5%/2 = 0.0425

Current yield = 100/1,069.3779618121

Current yield = 0.09351230675

Current yield = 9.351230675%

Now, we need to find the price one year from now with 5 years to maturity to find the capital gains

n = 5 * 2 = 10

cpn = 50

r = 0.0425

FV = 1,000

Capital gains = Price₁/Price - 1

Capital gains = 1,060.0816525552/1,069.3779618121 - 1

Capital gains = 0.9913068068 - 1

Capital gains = -0.0086931932

Capital gains = -0.86931932%