Question

Bond P is a premium bond with a coupon rate of 8.8 percent. Bond D is a discount bond with a coupon rate of 4.8 percent. Both bonds make annual payments, have a YTM of 6.8 percent, have a par value of $1,000, and have thirteen years to maturity. a. What is the current yield for Bond P? For Bond D? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) b. If interest rates remain unchanged, what is the expected capital gains yield over the next year for Bond P? For Bond D? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) Bond P Bond D Current yield Capital gains yield b.

Answer 1

A $ 1,169.06 $ 830.94 1 Bond P Price now 2 Bond D Price now 3 4. Bond P Price after 1 year 5 Bond D Price after 1 year $ 1,160.56 $ 839.44 6 7.53% 5.78% 7 Current yield: 8 Bond P 9 Bond D 10 11 Capital gains yield: 12 Bond P 13 Bond D -0.73% 1.02%

В =PV(6.8%,13,88,1000)*-1 =PV(6.8%,13,48,1000)*-1 1 Bond P Price now 2 Bond D Price now 3 4 Bond P Price after 1 year 5 Bond D Price after 1 year =PV(6.8%,12,88,1000)*-1 =PV(6.8%,12,48,1000)*-1 7 Current yield: 8 Bond P 9 Bond D =88/B1 =48/B2 11 Capital gains yield: 12 Bond P 13 Bond D =(B4-B1)/B1 =(B5-B2)/B2

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