Last year Carson Industries issued a 10-year, 12% semiannual coupon bond at its

Question

Last year Carson Industries issued a 10-year, 12% semiannual coupon bond at its par value of $1,000. Currently, the bond can be called in 6 years at a price of $1,060 and it sells for $1,150.

What is the bond's nominal yield to maturity? Do not round intermediate calculations. Round your answer to two decimal places. %

What is the bond's nominal yield to call? Do not round intermediate calculations. Round your answer to two decimal places. %

What is the 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.

What is the expected capital gains (or loss) yield for the coming year? Use amounts calculated in above requirements for calcuation, if reqired. Round your answer to two decimal places. Enter a loss percentage, if any, with a minus sign.
%

Explanation / Answer

Answer a.

Par Value = $1,000
Current Price = $1,150

Annual Coupon Rate = 12%
Semiannual Coupon Rate = 6%
Semiannual Coupon = 6%*$1,000 = $60

Time to Maturity = 10 years
Semiannual Period to Maturity = 20

Let semiannual YTM be i%

$1,150 = $60 * PVIFA(i%, 20) + $1,000 * PVIF(i%, 20)

Using financial calculator:
N = 20
PV = -1150
PMT = 60
FV = 1000

I = 4.815%

Semiannual YTM = 4.815%
Annual YTM = 2 * 4.815%
Annual YTM = 9.63%

Answer b.

Call Price = $1,060
Current Price = $1,150
Semiannual Coupon = $60

Time to Call = 6 years
Semiannual Period to Call = 12

Let semiannual YTC be i%

$1,150 = $60 * PVIFA(i%, 12) + $1,060 * PVIF(i%, 12)

Using financial calculator:
N = 12
PV = -1150
PMT = 60
FV = 1060

I = 4.718%

Semiannual YTC = 4.718%
Annual YTC = 2 * 4.718%
Annual YTC = 9.436% or 9.44%

Answer c.

Current Yield = Annual Coupon / Current Price
Current Yield = $120 / $1,150
Current Yield = 0.1043
Current Yield = 10.43%

Answer d.

Capital Gain Yield = Annual YTM - Current Yield
Capital Gain Yield = 9.63% - 10.43%
Capital Gain Yield = -0.80%

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