Question

6. Nungesser Corporation has issued bonds that have a 9 percent coupon rate, payable

semiannually. The bonds mature in 6 years, have a face value of $1,000, and a yield to maturity of 8.5 percent.

1). What is the price of the bonds?

$1,023.13

2). What is the current yield?

8.80%

3). What is the capital gains yield?

-0.30%

4). These bonds sell at

a. par b. a premium c. a discount

Premium. Please Show All Work.

Answer 1

Answer 1.

Face Value = $1,000

Annual Coupon Rate = 9%
Semiannual Coupon Rate = 4.5%
Semiannual Coupon = 4.5% * $1,000
Semiannual Coupon = $45

Time to Maturity = 6 years
Semiannual Period = 12

Annual YTM = 8.50%
Semiannual YTM = 4.25%

Price of Bond = $45 * PVIFA(4.25%, 12) + $1,000 * PVIF(4.25%, 12)
Price of Bond = $45 * (1 - (1/1.0425)^12) / 0.0425 + $1,000 / 1.0425^12
Price of Bond = $1,023.13

Answer 2.

Current Yield = Annual Coupon / Current Price
Current Yield = $90 / $1,023.13
Current Yield = 0.0880 or 8.80%

Answer 3.

Capital Gain Yield = Annual YTM - Current Yield
Capital Gain Yield = 8.50% - 8.80%
Capital Gain Yield = -0.30%

Answer 4.

These bonds are selling at premium as price of bond is higher than the par value.