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A bond offers a coupon rate of 7%, paid annually, and has a maturity of 10...

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Finance

A bond offers a coupon rate of 7%, paid annually, and has amaturity of 10 years. The current market yield is 9%. If marketconditions remain unchanged, what should be the Capital Gains Yieldof the bond?

Enter your answer as a percentage, without the percentage sign('%'), and rounded to 2 decimals. Use the minus sign ('-') if theyield is negative.

Answer & Explanation Solved by verified expert
4.5 Ratings (909 Votes)

Information provided:

Par value= future value= $1,000

Coupon rate= 7%

Coupon payment= 0.07*1,000= $70

Time= 10 years

Current market yield= 9%

Current yield is calculated using the below formula:

Current Yield= Annual interest/Current price

0.09= $70/ Current price

Current price= $70/ 0.09

                          = $777.7778    $777.78.

Capital gains yield is calculated using the below formula:

Capital Gains Yield= Current price-original price/Original price*100

                                = $777.78 - $1,000/ $1,000*100

                                = -0.2222*100

                                = -22.22.

In case of any query, kindly comment on the solution
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A bond offers a coupon rate of 7%, paid annually, and has amaturity of 10 years. The current market yield is 9%. If marketconditions remain unchanged, what should be the Capital Gains Yieldof the bond?Enter your answer as a percentage, without the percentage sign('%'), and rounded to 2 decimals. Use the minus sign ('-') if theyield is negative.

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