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A bond offers a coupon rate of 6%, paid annually, and has a maturity of 9...

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Finance

A bond offers a coupon rate of 6%, paid annually, and has amaturity of 9 years. The current market yield is 14%. If marketconditions remain unchanged, what should be the Capital Gains Yieldof the bond?

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4.3 Ratings (796 Votes)

Step-1:Calculation of Current price of bond
Present value of coupon $     296.78
Present value of Par value $     307.51
Present value of cash flows $     604.29
So, the price of bond is $     604.29
Working:
# 1 Annual coupon = Par Value * Coupon rate
= 1000*6%
= $       60.00
# 2 Present value of annuity of 1 = (1-(1+i)^-n)/i Where,
= (1-(1+0.14)^-9)/0.14 i 14%
= 4.9463718 n 9
# 3 Present value of 1 = (1+i)^-n
= (1+0.14)^-9
= 0.3075079
# 4 Present value of coupon = Coupon * Present value of annuity of 1
= $       60.00 * 4.946372
= $     296.78
# 5 Present value of Par value = Par Value * Present value of 1
= $ 1,000.00 * 0.307508
= $     307.51
Step-2:Calculation of dividend yield
Dividend yield = Annual coupon / Current Price
= $       60.00 / $ 604.29
= 9.93%
Step-3:Calculation of Capital gain yield
Capital gain yield = Market yield - Dividend yield
= 14.00% - 9.93%
= 4.07%
Thus,
Capital gain yield is 4.07%

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Transcribed Image Text

A bond offers a coupon rate of 6%, paid annually, and has amaturity of 9 years. The current market yield is 14%. If marketconditions remain unchanged, what should be the Capital Gains Yieldof the bond?

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