A 20-year, 10 percent semiannual coupon bond, with a par value of $1,000 sells f

Question

A 20-year, 10 percent semiannual coupon bond, with a par value of $1,000 sells for $1,200 (assume that the bond has just been issue today).

1. What is the bond's yield to maturity?

2. What is the bond's current yield?

3. What is the bond's capital gain or loss yield if the bond is purchasesd today and sold next year. (Hint: Find the values of the bond today and one year after. Or you can use the general relationship among 'yield-to-maturity', 'current yield' and 'capital gain/loss')

Please show all work with your answers.

Explanation / Answer

1. YTM = ( C+ (F -P) / n ) / F+P / 2

= ( 10 + ( 1000 - 1200) / 40 ) / 1000 + 1200 / 2

= 0.45%

2. Current yield = Annual cash flows / market price

= 10 / 1200 = 0.833%

3. Capital gain yield = P1 - P0 / P0   = 1200 - 10 / 1200 = 0.991.

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