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 ten 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

a	Bond P, Current Yield	8.26%
	Bond D, Current Yield	5.82%
b	Bond P, Capital gain Yield	-1.28% (Negative)
	Bond D, Capital gain Yield	1.17%

BOND-P, Current Yield & Capital Gain Yield

Price of Bond-P at 10 Years maturity

Bond Price = Present Value of the Coupon Payments + Present Value of the face Value

= $100[PVIFA 7%, 10 Years] + $1,000[PVIF 7%, 10 Years]

= [$100 x 7.02358] + [$1,000 x 0.50835]

= $702.36 + $508.35

= $1,210.71

Price of Bond-P at 9 Years maturity

Bond Price = Present Value of the Coupon Payments + Present Value of the face Value

= $100[PVIFA 7%, 9 Years] + $1,000[PVIF 7%, 9 Years]

= [$100 x 6.51523] + [$1,000 x 0.54393]

= $651.52 + $543.93

= $1,195.46

Current Yield

Current Yield = [Coupon Amount / Current Price of the Bond] x 100

= [$100 / $1,210.71] x 100

= 8.26%

Capital Gain Yield

Capital Gain Yield = [($1,195.46 - $1,210.71) / $1,210.71] x 100

= [-$15.25 / $1,210.71] x 100

= -1.28% (Negative)

BOND-D, Current Yield & Capital Gain Yield

Price of Bond-D at 10 Years maturity

Bond Price = Present Value of the Coupon Payments + Present Value of the face Value

= $50[PVIFA 7%, 10 Years] + $1,000[PVIF 7%, 10 Years]

= [$50 x 7.02358] + [$1,000 x 0.50835]

= $351.18 + $508.35

= $859.53

Price of Bond-D at 9 Years maturity

Bond Price = Present Value of the Coupon Payments + Present Value of the face Value

= $50[PVIFA 7%, 10 Years] + $1,000[PVIF 7%, 10 Years]

= [$50 x 6.51523] + [$1,000 x 0.54393]

= $325.76 + $543.94

= $869.70

Current Yield

Current Yield = [Coupon Amount / Current Price of the Bond] x 100

= [$50 / $859.53] x 100

= 5.82%

Capital Gain Yield

Capital Gain Yield = [($869.70 – 859.53) / $859.53] x 100

= [$10.17 / $859.53] x 100

= 1.17%