Question

Bond P is a premium bond with a coupon rate of 8.6 percent. Bond D is a discount bond with a coupon rate of 4.6 percent. Both bonds make annual payments, have a YTM of 6.6 percent, have a par value of $1,000, and have eleven years to maturity. a. What is the current yield for Bond P? For Bond D? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g. 32.16.) b. If interest rates remain unchanged, what is the expected capital gains yleld over the next year for Bond P? For Bond D? (A negative answer should be indicated bya minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

a. Bond P
Coupon rate =8.6%*1000 =86
Number of years =11
Price of Bond P =PV of coupon +PV of Par Value =86*((1-(1+6.6%)^-11)/6.6%+1000/(1+6.6%)^11 =1153.00
Current Yield of P=8.6%*1000/1153 =7.46%
Price of Bond D =PV of coupon +PV of Par Value =46*((1-(1+6.6%)^-11)/6.6%+1000/(1+6.6%)^11 =846.9923
Current Yield of D=4.6%*1000/846.9923 =5.43%

b. Next year Price of Bond P =PV of coupon +PV of Par Value =86*((1-(1+6.6%)^-10)/6.6%+1000/(1+6.6%)^10 =1143.1062
Capital gains yield =(1143.1062-1153.00)/1153.00 =-0.86%
Next year Price of Bond D =PV of coupon +PV of Par Value =46*((1-(1+6.6%)^-10)/6.6%+1000/(1+6.6%)^10 =856.8938
Capital gains yield =(856.8938-846.9923)/846.9923 =1.17%