In: Finance
Pelzer Printing Inc. has bonds outstanding with 9 years left to maturity. The bonds have a 9% 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 $905.35. The capital gains yield last year was -9.465%.
a.Information provided:
Face value= future value= $1,000
Market price= present value= $905.35
Time= 9 years
Coupon rate= 9%
Coupon payment= 0.09*1,000= $90
The yield to maturity is calculated by entering the below in a financial calculator:
FV= 1,000
PV= -905.35
N= 9
PMT= 90
Press the CPT key and I/Y to compute the yield to maturity.
The value obtained is 10.6888.
Therefore, the yield to maturity is 10.69%.
b.Current Yield is calculated using the below formula:
Current Yield= Annual interest/ Current price
Current Yield= $90/ $905.35
= 0.0994*100
= 9.94%.
c.Capital gains yield is calculated using the below formula:
Capital Gains Yield= 10.69% - 9.94%
= 0.75%.
In case of any query, kindly comment on the solution.