Question

Please show work.......thanks!

Fixed Income HW due 6/29/19

Assume today is June 19, 2019 and that all bonds pay interest annually with a face value of $1,000.

YTM = Current yield + Capital Gains yield; CY = Annual Interest/Current Price

GE is A rated; AA Treasuries yield 3-year is 1.90%, 10-year 2.10%

5 Years ago GE issued 6% coupon paying bonds with a face value set to mature on June 19, 2029. Growth concerns have forced monetary authorities throughout the world to lower interest rates during the past several years and as such, the price of these GE bonds has risen to 1175.00

1. What is yield to maturity for an investor who buys the bonds today at the current price?
2. Is the bond trading at a premium, discount or at par? Explain what your answer means
3. What is the capital gains yield of this bond and interpret what the sign of the CGY means?

Answer 1

Bond is trading at

a premium if the current market price of the bond is higher than its face value

a discount if the current market price of the bond is lower than its face value

par if the current market price of the bond is equal to its face value

In our case, the bond price is 1175 which higher than the face value of 1000. So, the bond is trading at a premium.

In the case of price appreciation, the CGY is positive. But, in this case as the bond is trading above its face value, there would be a capital loss at maturity equivalent to 1175-1000. So, the CGY is negative at this point.