Question

8, A firm issues a 5-year par bond with a coupon rate of 10% and a face value of $1000. The price of the bond is $900. What is this bond's yield-to-maturity? 9. What is the first-year capital gains yield of the bond in Question 8?

Answer 1

Answer:

Question 8)

Given

Face Value of Bond F=$1000

Bond Price P=$900

Coupon Rate C=10%

N=5 years

Let r be the yield to maturity

So P=C*F(1-(1+r)^-N)/r + F/(1+r)^N

900=10%*1000*(1-(1+r)^-5)/r +1000/(1+r)^5

Solving for r we get r=12.83%

Question 9)

Bond Price after one year when years to maturity will be 4 years

P1=C*F(1-(1+r)^-N)/r + F/(1+r)^N

P1=10%*1000*(1-(1+12.83%)^-4)/r +1000/(1+12.83%)^4

P1=915.52

Capital gain Yield =(P1-P)/P=(915.52-900)/900=1.72%