Bowman, Inc. has bonds outstanding with 7 years remaining to maturity. Suppose t

Question

Bowman, Inc. has bonds outstanding with 7 years remaining to maturity. Suppose the bonds have an 6% annual coupon interest rate and were issued on June 15, 2015 at their par value of $1,000. Interest rates have changed since the bonds were issued and the bonds’ market price now is $910.30.

TASKS: Please -

[a]         Show well-labeled calculations for Bowman, Inc.’s bond yield to maturity as of today.

[b]         Show well-labeled calculations to indicate the current yield and capital gains yield for Bowman Inc.’s bond for an investor who hold the bonds until they mature.

[c]         Suppose it is now June 15, 2025, and that investors in Bowman, Inc.’s bonds reinvested the coupon interest payments from Bowman, Inc. bonds at the rates shown below. Show well-labeled calculations to indicate the investor’s true yield on their Bridgewater bond investment.

- June 2018 - June 2021        = 4%

- June 2021 - June 2024        = 5%

-June 2024 - June 2025        = 6%

Explanation / Answer

a) Bond yield to maturity Par Value = FV $1,000.00 Coupon Rate 6.00% PMT $60.00 Current Price = PV $910.30 Nper 7 Yield to Maturity = Rate(7,60,-910.30,1000) 7.71% b) Current yield and capital gains Current Yield = Coupon Payment/ Current Price = $60/$910.30 6.59% Capital Gain Yield = 7.71% - 6.59% 1.11% c) True yield Effective yield June 2018 - June 2021 = effective rate = (1+4%)^3 - 1 12.49% June 2021 - June 2024 = effective rate = (1+5%)^3-1 15.76% June 2024 - June 2025 = effective rate = (1+ 6%)^1 -1 6.00% Average 11.42% True yield 11.42%

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