1. The corporate bond of Blue Sky Industrial currently sells at $1,094.00. The b
ID: 2383356 • Letter: 1
Question
1. The corporate bond of Blue Sky Industrial currently sells at $1,094.00. The bond has an annual coupon rate of 6% and a face value of $1,000. There are 12 years remaining to maturity.
a) What is the current yield of the bond?
b) What is the bond’s yield-to-maturity? (You may show calculator entries here).
c) What is the capital gains yield of the bond? (Show this in two ways if possible ).
2. A bond with 3 years remaining to maturity has an annual coupon rate of 8.5%, and a face value of $1,000. Assume the yield to maturity is 7.00% and answer the questions below. (You may use a financial calculator to get the PV of the bond in this problem – but show your calculator entries, i.e., 1000 FV, etc).
a) What is the duration of this bond?
b) If interest rates fall 0.15% from the given YTM, by what percent will the bond change in value? Show this 2 ways (using modified duration and the capital gains formula method).
Explanation / Answer
Current Yield of the bond = Annual Interest Payment/Current price
= 60/1094 = 5.48%
Yield to Maturity = Interest Payment + Face Value – Price/years to maturity/Face Value+Price/2
= 60 + 1094-1000/12/1094+1000/2
= 60 + 7.83/1047
= 6.47%
Capital Gains Yield = Current price – Original price/Original Price
= 1094-1000/1000 = 94/1000 = 0.094 or 9.4%
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