Pelzer Printing Inc. has bonds outstanding with 9 years left to maturity. The bo

Question

Pelzer Printing Inc. has bonds outstanding with 9 years left to maturity. The bonds have a 8% 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 $901.40. The capital gains yield last year was -9.86%.

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. %

Explanation / Answer

Solution: a. Yield to maturity (YTM) = 9.69% Working Notes: No. of period =nper = N = 9 Face value of bond = FV= $1,000 Price of the bond = PV = -$901.40 Annual Coupon amount = PMT = coupon rate x face value = 8% x $1,000 = $80 Now, For calculation YTM by excel type above data in below format =RATE(N,pmt,PV,FV) =RATE(9,80,-901.4,1000) 0.096911 =9.691% =9.69% YTM = 9.69% The above YTM can be calculated by financial calculator also b. Expected current yield = 8.88% Working Notes: Expected current yield= Annual coupon / Bond price Expected current yield= $80 /$901.40 Expected current yield= 0.088750832 Expected current yield= 8.875% Expected current yield= 8.88% annual coupon = face value x coupon rate = 1000 x 8% = 80 c. expected capital gains yield =0.82% Working Notes: Expected capital gains yield = YTM - Current yield =9.691 % - 8.875% =0.816 % =0.82 % Notes: Expected total return =YTM =Expected current yield + Expected capital gains yield Please feel free to ask if anything about above solution in comment section of the question.

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