Question

In: Finance

Pelzer Printing Inc. has bonds outstanding with 9 years left to maturity. The bonds have a...

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%.

  1. What is the yield to maturity? Do not round intermediate calculations. Round your answer to two decimal places.
       %
  2. 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.
       %
  3. 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.
       %

Solutions

Expert Solution

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.


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