Problem 8: a Bond P is a premium bond with a 10 percent coupon. Bond D is a 6 percent coupon bond currently selling at a discount. Both bonds make annual payments, have a YTM of 8 percent, and have five years to maturity. What is the current yield for each bond? (b) If interest rates remain unchanged, what is the expected capital gains yield over the next year for each bond? Semiannual coupon rates: Bond P: (0.10)($1,000) = $100 Bond D: (0.06) (1,000) = $60 To find the capital gains yield and the current yield, we need to find the price of the bond. The current price of Bond P and the price of Bond P in one year is: P: P. = $100* A*(5) $1,000 -40.08/2 0.08 230 =$1.079.85 1+ 2 P: P. = $100* A'(4) $1,000 , + (0.08 24 - =$1,066.24 2 Current yield = $100 / $1,079.85 = 9.26% The capital gains vield is: Capital gains yield = (New price - Original price) / Original price Capital gains yield = ($1,066.24 - 1,079.85) / $1,079.85 = -1.26% D: P, = $60* AN(3) $1,000 -20.08/2 + 0.08 245 - = $920.15 2 D: P, = $60* A 2(4) + $1,000 (0.08 204 = $933.76 2 Current yield = $60 / $920.15 = 6.52% Capital gains yield = ($933.76 - 920.15) / $920.15 =+1.48%