Question

Q6) A 04.90% annual coupon, 8-year bond has a yield to maturity of 09.80%. Assuming the par value is $1,000 and the YTM is expected not to change over the next year:    a) what should the price of the bond be today? (1 point)

b) What is bond price expected to be in one year? (1 point)

c) What is the expected Capital Gains Yield for this bond? (1 point)

d) What is the expected Current Yield for this bond? (1 point)

Answer 1

a.Information provided:

Par value= future value= $1,000

Time= 8 years

Coupon rate= 4.90%

Coupon payment= 0.049*1,000= $49

Yield to maturity= 9.80%

The price of the bond is calculated by computing the present value.

Enter the below in a financial calculator to compute the present value:

FV= 1,000

PMT= 49

I/Y= 9.80

N= 8

Press the CPT key and PV to compute the present value.

The value obtained is 736.67.

Therefore, the price of the bond today is $736.67.

b.Information provided:

Par value= future value= $1,000

Time= 9 years

Coupon rate= 4.90%

Coupon payment= 0.049*1,000= $49

Yield to maturity= 9.80%

The price of the bond in one year is calculated by computing the present value.

Enter the below in a financial calculator to compute the present value:

FV= 1,000

PMT= 49

I/Y= 9.80

N= 9

Press the CPT key and PV to compute the present value.

The value obtained is 715.55.

Therefore, the price of the bond in one year is $715.55.

c.Capital gains yield is calculated using the below formula:

Capital Gains Yield= Current price-original price/Original price*100

= $715.55 - $736.67/ $736.67*100

= -21.12/ $736.67*100

= -0.0287*100

= -2.87%.

d.Current Yield is calculated using the below formula:

Current Yield= Annual interest/Current price*100

= $49/ $736.67*100

= 0.0665*100

= 6.65%.

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