In: Finance
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. %
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. |