Bond P is a premium bond with a 10 percent coupon Bond D is

Bond P is a premium bond with a 10 percent coupon. Bond D is a 4 percent coupon bond currently selling at a discount. Both bonds make annual payments, have a YTM of 7 percent, and have eight years maturity to What is the current yield for bond P and bond D? (Round your answers to 2 decimal places. (e.g.. 32.16)) Current yiekd Bond P Bond D If interest rates remain unchanged, what is the expected capital gains yield over the next year for bond FP and bond D? (Negative amount should be indicated by a minus sign. Round your answers to 2 decimal places. (e.g., 32.16) Capital gains yield Bond P Bond D

Solution

a)

The current price of Bond P and the price of Bond P in one year is:

P : P0= $100 (PVIFA 7%, 8) + $ 1000 *  (PVIF 7%, 8)

= $ 100 * 5.9713 + $ 1000 * 0.582

= $ 1179.14

P1= $100 * (PVIFA 7%,7) + $1,000(PVIF7%,7) = $1,161.68

Current yield = $100 / $1,179.14 = .0848, or 8.48%

b)

The current price of Bond D and the price of Bond D in one year is:

D: P0 = $40 (PVIFA 7%,8) + $1,000 (PVIF 7%,8) = $820.86

P1= $40 (PVIFA7%,8) + $1,000(PVIF 7%,8) = $838.32

Current yield = $40 / $820.86 = .04873, or 4.873%

2

a)The capital gains yield is:

Capital gains yield = (New price –Original price) / Original price

Capital gains yield = ($1,161.68 –1,179.14) / $1,179.14 = -.01481, or -.1.48%

b) BOND D =

Capital gains yield = ($838.32 – $820.86) / $820.86 = 2.13%