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10-21I

Expert-verified
Found in: Page 330

### Essentials Of Investments

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

# 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?

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