Question

Renfro Corporation’s bonds will mature in 10 years. The bonds have a face value of $1,000 and an 8% coupon rate, paid semiannually. The price of the bonds is $1,100. What is the bond’s yield to maturity, current yield and capital gains yield?

Answer 1

Renfro Corporation

The bond's yield to maturity is:

= 0.067

The bond's current yield is:

= 0.073

The bond's capital gains yield is:

= -0.006

Step-by-step explanation:

a) Data and Calculations:

Maturity period of bonds = 10 years

Face value of the bonds = $1,000

Coupon rate = 8% paid semiannually

Price of the bonds = $1,100

Yield to maturity (YTM) = (C + {(FV - PV)/t})/{(FV + PV)/2}

where C = Coupon interest = $80 ($1,000 * 8%)

FV = Face value of the bonds

PV = Present value or price of the bonds

t = number of years

YTM = ($80 + {($1,000 - $1,100)/10})/{($1,000 + $1,100)/2}

= ($80 + {(-$100)/10})/{($2,100)/2}

= ($80 + $-10/$1,050

= $70/$1,050 = 0.06667

= 0.067

Current Yield = Annual interest/Price

= $80/$1,100

= 0.073

Capital gains yield = YTM - Current Yield

= 0.067 - 0.073

= -0.006