A 20-year, 8% semiannual coupon bond with a par value of $1,000 may be called in 5 years at a call price of $1,040. The bond sells for $1,100. (Assume that the bond has just been issued.)

Required:
a. What is the bond's yield to maturity?
b. What is the bond's current yield?
c. What is the bond's capital gain or loss yield?
d. What is the bond's yield to call?

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abiolataiwo2015 abiolataiwo2015 · Answer 1 · 2021-06-21T20:43:10+02:00

Answer:

A. 3.57%

B. 7.27%

C. 5.45%

Explanation:

a. Calculation to determine What is the bond's yield to maturity

Using this formula

SemiannualYTM=PMT+Par−Price÷N÷Par+Price/22

Where,

Par = $1,000

Annual payment = $1,000 x 8% = $80

Semiannual payment = $80 x 0.5 = $40

Price = $1,100

Call price = $1,040

Time to call = 5 years

Time to maturity = 20 years

Let plug in the formula

SemiannualYTM=$40+$1,000−$1,100÷20×2÷$

1,000+$1,100/2

SemiannualYTM=3.57%

b. Calculation to determine What is the bond's current yield

Using this formula

Current yield=Annual payment/price

Let plug in the formula

Current yield=80/1100

Current yield=7.27%

c. Calculation to determine What is the bond's capital gain or loss yield

Using this formula

Capital loss=Call price-Current price/Current price

Let plug in the formula

Capital loss=1040-1100/1100

Capital loss=5.45%