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Use this information to answer the following questions An outstanding 30 year corporate bond for a...

Use this information to answer the following questions

An outstanding 30 year corporate bond for a U.S. company has 14 years left to maturity and has a coupon rate of 4.0%. The bond is currently selling for $980.

1) What is the yield to maturity?

2) What is the current yield?

3) What is the capital gains yield?

Solutions

Expert Solution

Information provided:

Face value= future value= $1,000

Coupon rate= 4%

Coupon payment= 0.04*1,000= $40

Time= 14 years

Current price=present value= $980

1.The yield to maturity is calculated by entering the below in a financial calculator:

FV= 1,000

PV= -980

PMT= 40

N= 14

Press the CPT key and I/Y to compute the yield to maturity.

The value obtained is 4.1917.

Therefore, the yield to maturity is 4.19%.

2.Current yield is calculated using the below formula:

Current Yield= Annual interest/Current price

                          = $40/ $980

                       = 0.0408*100

                       = 4.08%.

3.Capital gains yield is calculated using the below formula:

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

                                     = $980 - $1,000/ $1,000*100

                                     = -20/ 1,000*100

                                     = -2%

In case of any query, kindly comment on the solution.

jeff jeffy answered 7 months ago
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