Question

Pelzer Printing Inc. has bonds outstanding with 9 years left to maturity. The bonds have a 8% annual coupon rate and were issued 1 year ago at their par value of $1,000. However, due to changes in interest rates, the bond's market price has fallen to $901.40. The capital gains yield last year was -9.86%.

What is the yield to maturity? Do not round intermediate calculations. Round your answer to two decimal places. %

For the coming year, what is the expected current yield? (Hint: Refer to footnote 7 for the definition of the current yield and to Table 7.1.) Do not round intermediate calculations. Round your answer to two decimal places. %

For the coming year, what is the expected capital gains yield? (Hint: Refer to footnote 7 for the definition of the current yield and to Table 7.1.) Do not round intermediate calculations. Round your answer to two decimal places. %

Answer 1

Solution:
a.	Yield to maturity (YTM) = 9.69%
Working Notes:
	No. of period =nper = N = 9
	Face value of bond = FV= $1,000
	Price of the bond = PV = -$901.40
	Annual Coupon amount = PMT = coupon rate x face value = 8% x $1,000 = $80
Now,
	For calculation YTM by excel
	type above data in below format
	=RATE(N,pmt,PV,FV)
	=RATE(9,80,-901.4,1000)
	0.096911
	=9.691%
	=9.69%
	YTM = 9.69%
	The above YTM can be calculated by financial calculator also
b.	Expected current yield = 8.88%
Working Notes:
	Expected current yield= Annual coupon / Bond price
	Expected current yield= $80 /$901.40
	Expected current yield= 0.088750832
	Expected current yield= 8.875%
	Expected current yield= 8.88%
	annual coupon = face value x coupon rate = 1000 x 8% = 80
c.	expected capital gains yield =0.82%
Working Notes:
	Expected capital gains yield = YTM - Current yield
		=9.691 % - 8.875%
		=0.816 %
		=0.82 %
Notes:	Expected total return =YTM =Expected current yield + Expected capital gains yield
Please feel free to ask if anything about above solution in comment section of the question.