Hooper Printing Inc. has bonds outstanding with 9 years left to maturity. The bo

Question

Hooper Printing Inc. has bonds outstanding with 9 years left to maturity. The bonds have an 8% annual coupon rate and were issued 1 year ago at their par value of $1,000. However, due to changes in interest rates, the bond's market price has fallen to $901.40. The capital gains yield last year was - 9.86%. a.What is the yield to maturity? Round your answer to two decimal places. % b.For the coming year, what is the expected current yield? (Hint: Refer to Footnote 7 for the definition of the current yield and to Table 7.1.) Round your answer to two decimal places. % For the coming year, what is the expected capital gains yield? (Hint: Refer to Footnote 7 for the definition of the current yield and to Table 7.1.) Round your answer to two decimal places. %

Explanation / Answer

The current yeild is $80 (the coupon) divided by $901.40 (The current market value). Sorry my calculator is in the other room. It should be a little less than 9%. Expected Capital gains will be a little less than $10. (1000-901.40)/9 is a quick approximation. Actually, it's 901.40 times the ninth root of (1000/901.40 - 1) [if I remember the formula that I learned about 25 years ago]

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