Question

A bond has a par value of $1,000, a time to maturity of 15 years, and a coupon rate of 9.00% with interest paid annually. If the current market price is $900, what will be the approximate capital gain of this bond over the next year if its yield to maturity remains unchanged?

Answer 1

The capital gain yield would be 0.34%

Step-by-step explanation:

The rate is computed by using the excel formula of rate as:

= Rate ( nper, pmt, -pv, fv)

where

nper is number of periods which is 15 years

pmt = fv × Coupon rate

= 1,000 × 9%

= 90

pv is present value which is $900

fv is face value which is $1,000

= Rate ( 15, 90, -900, 1000)

= 10.34%

The price after 1 year would be:

By using the excel, it is computed:

= -pv (rate, nper, pmt, fv)

= -900 (10.34%, 14, 90, 1000)

= $903.06

The capital gain yield would be:

Capital gain yield = (Price after 1 year - PV) / PV

= ($903.06 - $900) / $900

= 3.06 / 900

= 0.34%