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One year ago, the market required a 6.50% return (YTM) on a Beta Warehouse 15-year bond...

One year ago, the market required a 6.50% return (YTM) on a Beta Warehouse 15-year bond which was priced at par. The bond pays interest annually. Today, the market required return (YTM) on the Beta bond is 7.20%. What was the capital gains yield on this bond?

Group of answer choices

-6.30%

-6.05%

-5.38%

-4.99%

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Answer #1

Price of a bond 1 -year ago was equal to par value (say $1000), as mentioned in question. By this, its coupon rate would be equal to YTM = 6.50%

Price today can be calculated using basic bond price formula, according to which

where P is price of a bond with periodic coupon C, n periods to maturity, periodic YTM i, M face value.

For this question,

M = $1000, n = 14, C = 6.50% * $1000 = $65, i = 7.20%

P = $561.70 + $377.81

P = $939.51

Capital gains Yield = ($939.51 - $1000)/$1000 * 100 = -6.05%

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