Hooper Printing Inc. has bonds outstanding with 19 years left to maturity. The b

Question

Hooper Printing Inc. has bonds outstanding with 19 years left to maturity. The bonds have an 7% annual coupon rate and were issued one year ago at their par value of $1,000 , but due to changes in interest rates, the bond's market price has fallen to $890.20 The capital gains yield last year was - 10.98%.

A.For the coming year, what is the expected current yield? Round your answer to two decimal places.
%

B. For the coming year, what is the expected capital gains yield? Round your answer to two decimal places.

Explanation / Answer

a) The current yield is defined as the annual coupon payment divided by the current price.

CY = $70/$890.20 = 0.07863 = 7.86%

b) Expected capital gains yield can be found as the difference between YTM and the current yield.

N = 9

I = YTM

PV = -901.40

PMT = 80

FV = 1000

I = YTM = 8.1516996%

CGY = YTM - CY = 8.151% - 7.863% = 0.288 = 0.29%

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