Question
In: Finance
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 8 months agoRelated Solutions
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