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Today is T=0. A bond has a 6% coupon rate, annual payments and 8 years until...

Today is T=0. A bond has a 6% coupon rate, annual payments and 8 years until maturity. If the bond sells for $833.9554 what is your capital gain yield between T=6 and T=7.

Solutions

Expert Solution

First we have to calculate yield to maturity of the bond

Coupon payments = 1000*6% = 60

Number of periods = 8

Current value = 833.9554

Using financial calculator

[N=8 ; I/Y = ? ; PV = -833.9554 ; PMT = 60 ; FV = 1000]

YTM = 9%

Using above rate we have to calculate price at T= 6

[N = 2 ; I/Y = 9% ; PV = ? ; PMT = 60 ; FV = 1000]

Price = $947.23

Current yield = coupon / current price

= 60 / 947.23

= 6.33%

Capital gain yield = YTM - Current yield

= 9% - 6.33%

= 2.67%

  

jeff jeffy answered 2 years ago
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