Problem 710 Current yield capital gains yield and yield to m

Problem 7-10 Current yield, capital gains yield, and yield to maturity Ho per Printing nc. has bonds outstanding with 9 years left to maturity. The bonds have an % annual coupon rate and were issued market price has fallen to $910.40. The capital gains yield last year was-8.95%. year ago at their par value or$1,00 However, due to changes in interest rates, the bonds a. What is the yield to maturity? Round your answer to two decimal places. b. For the coming year, what is the expected current yield? (Hint: Refer to Footnote 7 for the definition of the current yield and to Table 7.1.) Round your answer to two decimal places For the coming year, what is the expected capital gains yield? (Hint: Refer to Footnote 7 for the definition of the current yield and to Table 7.1.) Round your answer to two decimal places C. Will the actual realized yields be equal to the expected yields if interest rates change? If not, how will they differ? I. As long as promised coupon payments are made, the current yield will change as a result of changing interest rates. However, changing rates will not cause the price to change and as a result, the realized return to investors should equal the YTM II. As rates change they will cause the end-of-year price to change and thus the realized capital gains yield to change. As a result, the realized return to investors will differ from the YTM. III. As long as promised coupon payments are made, the current yield will change as a result of changing interest rates. However, changing rates will cause the price to change and as a result, the realized return to investors will differ from the YTM IV. As long as promised coupon payments are made, the current yield wl not change as a result of changing interest rates. However, changing rates will cause the price to change and as a result, the realized return to investors should equal the YTM. V. As long as promised coupon payments are made, the current yield will change as a result of changing interest rates. However, changing rates will cause the price to change and as a result, the realized return to investors should equal the YTM VSolect-

Solution

1)

Coupon payment = 0.08 * 1000 = 80

Number of periods = 9 years

Yield to maturity using a financial calculator = 9.53%

Keys to use in a financial calculator: FV = 1000, PV = -910.4, PMT = 80, N = 9, CPT I/Y

2)

Current yield = Annual coupon / Price

Current yield = 80 / 910.4

Current yield = 0.0878 or 8.79%

3)

Capital gains yield = 9.53% - 8.79%

Capital gains yield = 0.74%

4)

As long as promised coupon payments are made, the current yield will change as a result of changing interest rates. However, changing rates will cause the price to change and as a result, the realized return to investors will differ from the YTM.