Question

Bond P is a premium bond with a coupon rate of 9.9 percent. Bond D is a discour percent. Both bonds make annual payments, a YTM of 7.9 percent, a par value of maturity. a. What is the current yield for Bond P ? For Bond D ? Note: Do not round intermediate calculations and enter your answers as a p e.g., 32.16 b. If interest rates remain unchanged, what is the expected capital gains yield ove D? Note: A negative answer should be indicated by a minus sign. Do not round your answers as a percent rounded to 2 decimal places, e.g., 32.16. Bond P is a premium bond with a coupon rate of 9.9 percent. Bond D is a discount bond with a coupon rate of 5.9 percent. Both bonds make annual payments, a YTM of 7.9 percent, a par value of $1,000, and have fourteen years to maturity.

a. What is the current yield for Bond P ? For Bond D? Note: 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? Note: 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.

Answer 1

a. The current yield for Bond P is 9.90% and for Bond D is 5.90%.

b. If interest rates remain unchanged, the expected capital gains yield over the next year for Bond P is -2.00% and for Bond D is 2.00%.

Here are the calculations:

Current Yield

The current yield is the annual coupon payment divided by the current market price of the bond. For Bond P, the current market price is equal to the par value of $1,000. For Bond D, the current market price is less than the par value of $1,000 because it is a discount bond.

Current Yield for Bond P = (Coupon Payment / Par Value) × 100%

Current Yield for Bond P = ($99 / $1,000) × 100% = 9.90%

Current Yield for Bond D = (Coupon Payment / Par Value) × 100%

Current Yield for Bond D = ($59 / $1,000) × 100% = 5.90%

Expected Capital Gains Yield

The expected capital gains yield is the expected increase in the bond's price over the next year divided by the current market price of the bond. If interest rates remain unchanged, the bond's price will increase to its par value of $1,000 at maturity.

Expected Capital Gains Yield for Bond P = (Par Value - Current Market Price) / Current Market Price × 100%

Expected Capital Gains Yield for Bond P = ($1,000 - $1,000) / $1,000 × 100% = 0.00%

Expected Capital Gains Yield for Bond D = (Par Value - Current Market Price) / Current Market Price × 100%

Expected Capital Gains Yield for Bond D = ($1,000 - $941) / $941 × 100% = 6.28%

Bond D, a discount bond, anticipates a negative capital gains yield due to expected price decrease. With $59 discount amortization, its capital gains yield equals the negative discount amortization divided by the current bond price.

Expected Capital Gains Yield for Bond D = - (Discount Amortization) / Current Market Price × 100%

Expected Capital Gains Yield for Bond D = - ($59) / $941 × 100% = -6.28%