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    Bond-Current yield, capital gains yield, yield to maturity

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    Hooper Printing Inc. has bonds outstanding with 9 years left to maturity. The bonds have an 8 percent annual coupon rate and were issued 1 year ago at their par value of $1,000, but due to changes in interest rates, the bond's market price has fallen to $901.40. The capital gains yield last year was -9.86 percent.

    a. What is the yield to maturity?
    b. For the coming year, what is the expected current yield and the expected capital gains yield?
    c. Will the actual realized yields be equal to the expected yields if interest rates change? If not, how will they differ?

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    Solution Preview

    Hooper Printing Inc. has bonds outstanding with 9 years left to maturity. The bonds have an 8 percent annual coupon rate and were issued 1 year ago at their par value of $1,000, but due to changes in interest rates, the bond's market price has fallen to $901.40. The capital gains yield last year was -9.86 percent.

    a. What is the yield to maturity?

    b. For the coming year, what is the expected current yield and the expected capital gains yield?

    c. Will the actual realized yields be equal to the expected yields if interest rates change? If not, how will they differ?

    a. What is the yield to maturity?

    Yield to Maturity (YTM) can be found by trial and error
    We will find the discount rate that makes the discounted cash flows equal to the price of the bond

    At 9.67% YTM price= $901.12
    which is close to $901.40

    To calculate the price of the bond we need to calculate / read from tables the values ...

    Solution Summary

    The solution calculates current yield, capital gains yield and yield to maturity of a bond

    $2.19