Question

Question 4. The price of a bond with 4 years to maturity that pays interest of $12 each half-year is $106. What is the current yield, the capital gains yield and the yield to maturity of this bond

Answer 1

Face value of bond = 100

Years of maturity = 4

Market value = 106

Coupon frequency = 2

Semi annual coupon = 12

1. Current yield = Semi-annual * Coupon frequency / Market value

Current yield = 12 * 2 / 106

Current yield = 0.2264150943396226

Current yield = 22.64%

2. YTM = 2*Rate(Years of maturity*Coupon frequency, Semi annual, - market value, FV, 0)

YTM = 2*Rate(4, 2, 12, -106, 100,0)

YTM = 0.2168

YTM = 21.68%

3. Capital yield = Current yield - YTM

Capital yield = 21.68% - 22.64%

Capital yield = -0.96%