10-21I

Expert-verifiedFound in: Page 330

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?**

** **

The capital gain yield will be $11.70

PV = $-800

FV = $1000

PMT = 80

t = 9

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

= (1000 / 800) )^(1/9)−1

= 11.46%

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

94% of StudySmarter users get better grades.

Sign up for free