Current Yield vs. Yield to Maturity Current Yield annual coupon / price Yield to

Question

Current Yield vs. Yield to Maturity Current Yield annual coupon / price Yield to maturity = current yield + capital gains yield Example: 10% coupon bond, with semiannual coupons, face value of 1,000, 20 years to maturity, $1,197.93 price -Current yield 100 / 1,197.93 .0835 8.35% - Price in one year, assuming no change in YTM- 1,193.68 - Capital gain vield (1,193.68-1,197.93)/ 1,197.93 .0035 -35 YTM-8.35-.35 computed earlier 8%, which is the same YTM 7-14 u may wish to discuss the components of required returns for bonds in a fashion analogous to the stock return discussion in the next chapter. As with common

Explanation / Answer

Below is the calculation for Bond price.

Cashflow = coupon rate /2 * face value --------------------> since the payment is semi-annual

Present Value (PV) = cash flow / ( (1 + ytm)^Period)

Bond Price = sum of all PVs

In one year, we will have only 38 (19 *2) coupon payments remaining. Bond price calculation is shown below.

Coupon rate 10% YTM 8% Face value 1000 Period Cashflow PV Bond Price 1 50 48.08 1197.93 2 50 46.23 3 50 44.45 4 50 42.74 5 50 41.10 6 50 39.52 7 50 38.00 8 50 36.53 9 50 35.13 10 50 33.78 11 50 32.48 12 50 31.23 13 50 30.03 14 50 28.87 15 50 27.76 16 50 26.70 17 50 25.67 18 50 24.68 19 50 23.73 20 50 22.82 21 50 21.94 22 50 21.10 23 50 20.29 24 50 19.51 25 50 18.76 26 50 18.03 27 50 17.34 28 50 16.67 29 50 16.03 30 50 15.42 31 50 14.82 32 50 14.25 33 50 13.70 34 50 13.18 35 50 12.67 36 50 12.18 37 50 11.71 38 50 11.26 39 50 10.83 40 1050 218.70

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