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A bond offers a coupon rate of 4%, paid annually, and has a maturity of 5...

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Finance

A bond offers a coupon rate of 4%, paid annually, and has amaturity of 5 years. The current market yield is 9%. If marketconditions remain unchanged, what should be the Capital Gains Yieldof the bond?

Answer & Explanation Solved by verified expert
4.2 Ratings (549 Votes)

Step-1:Calculation of current price of bond
Current price = =-pv(rate,nper,pmt,fv)
= $              805.52
Where,
rate Market yield 9%
nper Number of period 5
pmt Coupon payment $             40
fv Face value $       1,000
Step-2:Calculation of current yield
Current yield = Annual coupon / Current price
= $                      40 / $ 805.52
= 4.97%
Step-3:Calculation of Capital gain Yield
Capital Gain Yield = Market yield - Current yield
= 9% - 4.97%
= 4.03%
Capital gain yield should be 4.03%

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Transcribed Image Text

A bond offers a coupon rate of 4%, paid annually, and has amaturity of 5 years. The current market yield is 9%. If marketconditions remain unchanged, what should be the Capital Gains Yieldof the bond?

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