Question

A bond offers a coupon rate of 9%, paid annually, and has a maturity of 15 years. The current market yield is 7%. Face value is $1,000. If market conditions remain unchanged, what should be the Capital Gains Yield of the bond?

Answer 1

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =15

Bond Price =∑ [(9*1000/100)/(1 + 7/100)^k]     +   1000/(1 + 7/100)^15

k=1

Bond Price = 1182.16

Using Calculator: press buttons "2ND"+"FV" then assign

PMT = Par value * coupon %=1000*9/(100)

I/Y =7

N =15

FV =1000

CPT PV

Using Excel

=PV(rate,nper,pmt,FV,type)

=PV(7/(100),15,-9*1000/(100),-1000,)

capital gains yield = ((Ending price)/Beginning price-1)

=((1174.91)/1182.16-1)

=-0.61%

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =14

Bond Price =∑ [(9*1000/100)/(1 + 7/100)^k]     +   1000/(1 + 7/100)^14

k=1

Bond Price = 1174.91

Using Calculator: press buttons "2ND"+"FV" then assign

PMT = Par value * coupon %=1000*9/(100)

I/Y =7

N =14

FV =1000

CPT PV

Using Excel

=PV(rate,nper,pmt,FV,type)

=PV(7/(100),14,-9*1000/(100),-1000,)