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In: Finance

Bond Returns: A 15-year, $1,000 par value bond has an 8.5% annual payment coupon. The bond...

Bond Returns:

A 15-year, $1,000 par value bond has an 8.5% annual payment coupon. The bond currently sells for $925. After one year, assuming the the yield to maturity (discount rate) remains the same as previous, calculate the following returns between the two years:

1) Current yield

2) Capital gains yield

3) Total returns

Hint:

  • solve the rate (yield to maturity) for the 25-year bond.
  • with the same yield to maturity, solve the price for the bond with shorter maturity.
  • Show all your work for full credit.
year 0 1
rate ?? 10%
nper 15 14
pmt 85 85
pv -925 ??
fv 1000 1000
type 0 0
excel rate pv
calculation ?? ??
price ?? ?? <-- from calculation
coupon ?? <-- from bond specifications
current yield ?? <-- coupon / last price
capital gains yield ?? <-- % change in price
Total return ?? <-- current yield + capital yield

Solutions

Expert Solution

jeff jeffy answered 1 year ago
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