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10-21I

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Essentials Of Investments
Found in: Page 330
Essentials Of Investments

Essentials Of Investments

Book edition 9th
Author(s) Zvi Bodie, Alex Kane, Alan Marcus, Alan J. Marcus
Pages 748 pages
ISBN 9780078034695

Short Answer

A bond has a par value of $1,000, a time to maturity of 10 years, and a coupon rate of 8% with interest paid annually. If the current market price is $800, what will be the approximate capital gain yield of this bond over the next year if its yield to maturity remains unchanged?

The capital gain yield will be $11.70

See the step by step solution

Step by Step Solution

Given information

PV = $-800

FV = $1000

PMT = 80

t = 9

Calculation of price, maturity years, YTM and Bond equivalent YTM

Yield To Maturity = (Face Value/Current Bond Price)^(1/Years To Maturity)−1

= (1000 / 800) )^(1/9)−1

= 11.46%

Calculation of capital gain yield

PV = -800

FV = $1000

PMT = 80

t = 9

i = 11.46%

The current yield = 80 / 800 = 10%

YTM = Current yield + Capital gain yield

11.46 = 10 + Capital gain yield

Capital gain = 1.46% of PV

New price = $811.70

Thus capital gain yield = $811.70 - $800

= $ 11.70

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