Pelzer Printing Inc has bonds outstanding with 24 years left

Pelzer Printing Inc. has bonds outstanding with 24 years left to maturity. The bonds have a 12% annual coupon rate and were issued 1 year ago at their par value of $1,000. However, due to changes in interest rates, the bond\'s market price has fallen to $920.70. The capital gains yield last year was -7.93%. What is the yield to maturity? Do not round intermediate calculations. Round your answer to two decimal places. % 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.) Do not round intermediate calculations. 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.) Do not round intermediate calculations. Round your answer to two decimal places. %

Solution

1)

Coupon payment = 0.12 * 1000 = 120

Number of periods = 24 years

Yield to maturity using a financial calculator = 0.130956 or 13.1%

Keys to use in a financial calculator: FV = 1000, PV = -920.70, PMT = 120, N = 24, CPT I/Y

2)

Current yield = Annual coupon / Price

Current yield = 120 / 920.70

Current yield = 0.13033 or 13.03%

3)

Capital gains yield = 13.1% - 13.03%

Capital gains yield = 0.07%