Question

A 10-year corporate bond has an annual coupon payment of 8%. The bond is currently selling at par ($1,000). Which of the following statement is NOT correct? The bond’s yield to maturity is 8%. The bond’s current yield is 8%. If the bond’s yield to maturity remains constant, the bond’s price will remain at par. The bond’s capital gain yield is 8%.

Answer 1

The bond's capital gain yield is 8% is not correct as capital gain yield is 0%

Step-by-step explanation:

The bond yield to maturity is 8% ,which can be proved by computing yield using rate formula in excel

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

nper is 10 years

pmt is 8%*$1000=$80

pv and fv are both %=$1000

=rate(10,80,-1000,1000)=8.00%

The current yield is the same as yield to maturity of 8%

If the bond's yield remains at 8%,there is no doubt that the price will remain at $1000 par value which can proved with pv formula in excel

=pv(rate,nper,pmt,fv)

=pv(8%,10,80,1000)=$1000

The bond capital gain yield is zero since capital yield relates to movement in prices of the bond

capital gain yield =current price-face value/current price

=(1000-1000)/1000=0%