Question

Bond P is a premium bond with a coupon rate of 10 percent. Bond D has a coupon rate of 5 percent and is currently selling at a discount. Both bonds make annual payments, have a YTM of 7 percent, and have nine years to maturity.

  

What is the current yield for bond P and bond D? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

	Current yield
Bond P	%
Bond D	%

If interest rates remain unchanged, what is the expected capital gains yield over the next year for bond P and bond D? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

	Capital gains yield
Bond P	%
Bond D	%

Answer 1

Bond P Coupon 10 % YTM 7% Maturity 9 years

Bond D Coupon 5 % YTM 7% Maturity 9 years

To calculate current yield we need to find the market price of the bonds first.

Let us assume the Face value and maturity of bonds be 100 so

Bond P coupon = 10 and Bond D coupon = 5 and these coupons and maturity value of bonds need to be discounted by YTM to get present value of the bonds

Bond P present value P₀₌

= 119.55

Similarly Bond D₀₌

= 86.97

now to calculate yield

current yield = coupon/ present value of the bond

Bond P current yield = 10/119.55 = 8.36 %

Bond D current yield = 5/86.97 = 5.74 %

Current yield
Bond P	8.36 %
Bond D	5.74 %

To calculate capital gain maturity value is also considered

For bond P capital gain = Maturity Value - Present Value

= 100 - 119.55

= - 19.55

and capital gain yield = capital gain / PV = -19.55/119.55 = -16.35 %

Similarly for Bond D

capital gain = 100 - 86.97

= 13.03

capital gain yield = 13.03/86.97 = 14.98%

Capital gains yield
Bond P	- 16.35 %
Bond D	14.98 %