A bond has a face value of $1200 and a 10% coupon rate, its current price...

Question

Question

A bond has a face value of $1200 and a 10% coupon rate, its current price is $1140 and it is expected to increase to $1150 next year.

Answer 1

Answer #1

Calculating the current yield

Coupon = 10% of $ 1,200 = $ 120

Current price = $ 1,140

Now calculating the capital gain.

Capital gain = P₁ - P₀

Capital gain = $ 1,150 - $ 1,140 = $ 10

Expected rate of return = current yield + capital gain

Expected Rate of Return = 10.53 + 0.88 = 11.41 %

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Answer 2

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