Question

Consider the following bond: Face value = $1000; coupon rate = 8%; yield to maturity = 5%; maturity = 5 years.

a. If interest payments are made annually, what is the value of this bond? What are this year's current yield to capital gains yield?

b. What is the value of the bond 3 years from now? What are the current yield to capital gains yield to be 3 years from now?

c. thank you.

Answer 1

Bond Par Value = $1,000

Coupon Payment = $80

Time to Maturity = 5 years

YTM = 5%

a.

Calculating Bond Price,

Using TVM Calculation,

PV = [FV = 1,000, PMT = 80, N = 5, I = 0.05]

PV = $1,129.88

Current Yield = 80/1,129.88 = 7.08%

Capital Gain Yield = YTM - Current Yield

Capital Gain Yield = 0.05 - 0.0708

Capital Gain Yield = -2.08%

b.

At the end of Year 3,

Calculating Bond Price,

Using TVM Calculation,

PV = [FV = 1,000, PMT = 80, N = 2, I = 0.05]

PV = $1,055.78

Current Yield = 80/1,055.78 = 7.58%

Capital Gain Yield = YTM - Current Yield

Capital Gain Yield = 0.05 - 0.0758

Capital Gain Yield = -2.58%