CH. 7, #9 Bond P is a premium bond with a coupon rate of 8 percent. Bond D has a

Question

CH. 7, #9

Bond P is a premium bond with a coupon rate of 8 percent. Bond D has a coupon rate of 3 percent and is currently selling at a discount. Both bonds make annual payments, have a YTM of 5 percent, and have eight years to maturity.

What is the current yield for bond P and bond D? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

If interest rates remain unchanged, what is the expected capital gains yield over the next year for bond P and bond D? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

What is the current yield for bond P and bond D? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

Explanation / Answer

Case1 Let par value of bond=100 Bond P =8(PVAF 5%, 8years)+100(PVAF 5%, 8th Year) 8*6.463+100*.6768 119.384 Bond Q= 3(PVAF 5%,8 Years)+100(PVAF 5%, 8th Year) 3*6.463+100*.6768 87.069 Current yield of P= 8/119.384*100=6.70% Q= 3/87.069*100=3.45% Case2: Let par value of bond=100 Bond P =8(PVAF 5%, 7years)+100(PVAF 5%, 7th Year) 8*5.786+100*.7107 117.358 Bond Q= 3(PVAF 5%,7 Years)+100(PVAF 5%, 7th Year) 3*5.786+100*.7107 88.428 Capital gain yield= new price- old price/ old price Bond P= 117.358-119.384/117.358=-1.726% Bond Q= 88.428-87.069/88.428=1.537%

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