Question: Recall the formula for current yield, Current Yield = (Annual Coupon Interest Payment) / (Current Price of Bond) Substitute the given values: Annual Coupon

  1. Recall the formula for current yield, Current Yield = (Annual Coupon Interest Payment) / (Current Price of Bond)
    2.  
  2. Substitute the given values:
    • Annual Coupon Interest Payment = 8% of $1,000
    • Current Price of Bond = $964
  3. Calculate the current yield using the formula.

Step 2: Calculate Capital Gains Yield

  1. Remember the formula for capital gains yield: Capital Gains Yield = (Expected Change in Bond's Price) / (Beginning-of-Year Price)
  2. Using the data from the previous calculation and the given sale price of the bond after one year, which is $1,075, determine the expected change in the bond's price.
  3. Calculate the capital gains yield using the formula.

Step 3: Determine Total Expected Return

  1. Recall the formula for total expected return: Total Expected Return = Current Yield + Capital Gains Yield
  2. Use the results from Steps 1 and 2 to calculate the total expected return.

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