Pelzer Printing Inc. has bonds outstanding with 24 years left to maturity. The b

Question

Pelzer Printing Inc. has bonds outstanding with 24 years left to maturity. The bonds have a 12% annual coupon rate and were issued 1 year ago at their par value of $1,000. However, due to changes in interest rates, the bond's market price has fallen to $920.70. The capital gains yield last year was -7.93%.

a. What is the yield to maturity? Do not round intermediate calculations. Round your answer to two decimal places.

b. For the coming year, what is the expected current yield? (Hint: Refer to footnote 7 for the definition of the current yield and to Table 7.1.) Do not round intermediate calculations. Round your answer to two decimal places.

c. For the coming year, what is the expected capital gains yield? (Hint: Refer to footnote 7 for the definition of the current yield and to Table 7.1.) Do not round intermediate calculations. Round your answer to two decimal places.

Explanation / Answer

YTM:

PV = 920.70

FV = 1000

PMT = 0.12*1000 = 120

N = 24

R = ?

Using excel function,

R = Rate(N,PMT,PV,FV)

Rate(24,-120,920.70,-1000) =0.130956

YTM = 13.0956%

Expected current yield = Coupon / Bond price = 120/920.70 = 13.0336%

Expected capital gains yield = YTM - Expected current yield = 13.0956 - 13.0336 = 0.062%

As rates change they will cause the end-of-year price to change and thus the realized capital gains yield to change. As a result, the realized return to investors will differ from the YTM.

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