Question

Pelzer Printing Inc. has bonds outstanding with 9 years left to maturity. The bonds have an 9% annual coupon rate and were issued 1 year ago at their par value of $1,000. However, due to changes in interest rates, the bond's market price has fallen to $910.30. The capital gains yield last year was -8.97%

A. What is the yield to maturity? Round your answer to two decimal places. %
B. For the coming year, what is the expected current yield? (Hint: Refer to footnote 7 for the definition of the current yield and to Table 7.1.) Round your answer to two decimal places. %
For the coming year, what is the expected capital gains yield? (Hint: Refer to footnote 7 for the definition of the current yield and to Table 7.1.) Round your answer to two decimal places. %
C. Will the actual realized yields be equal to the expected yields if interest rates change? If not, how will they differ?
I. As rates change they will cause the end-of-year price to change and thus the realized capital gains yield to change. As a result, the realized return to investors will differ from the YTM.
II. As long as promised coupon payments are made, the current yield will change as a result of changing interest rates. However, changing rates will cause the price to change and as a result, the realized return to investors will differ from the YTM.
III. As long as promised coupon payments are made, the current yield will not change as a result of changing interest rates. However, changing rates will cause the price to change and as a result, the realized return to investors should equal the YTM.
IV. As long as promised coupon payments are made, the current yield will change as a result of changing interest rates. However, changing rates will cause the price to change and as a result, the realized return to investors should equal the YTM.
V. As long as promised coupon payments are made, the current yield will change as a result of changing interest rates. However, changing rates will not cause the price to change and as a result, the realized return to investors should equal the YTM.

Answer 1

The yield to maturity for Pelzer Printing Inc.'s bonds requires a complex calculation, but the current yield can be approximated to 9.89% using the coupon payment and current market price. Capital gains yield cannot be predicted without knowledge of future market prices. The actual realized yields may differ from the expected yields if interest rates change.

Step-by-step explanation:

To calculate the yield to maturity (YTM) of Pelzer Printing Inc.'s bonds, we need to consider the bond's current price, face value, coupon rate, and time to maturity. The YTM is a complex calculation that involves finding the rate at which the present value of all future cash flows equals the bond's current price.

The current yield for the coming year is simpler to calculate. It's found by dividing the annual coupon payment by the bond's current market price. The coupon payment is the face value times the coupon rate, which is $1,000 * 9% = $90. Therefore, the current yield is $90 / $910.30 = approximately 9.89%.

The capital gains yield for the coming year is expected to be the difference between the YTM and the current yield. In this case, we have been given the capital gains yield for last year but not for the coming year, as it will depend on changes in the market price. Since we are not provided with future market prices or interest rate changes, we cannot calculate the capital gains yield for the coming year.

Regarding the last part of the question, the correct statement is I: As rates change they will cause the end-of-year price to change, and thus the realized capital gains yield to change. As a result, the realized return to investors will differ from the YTM.