Hooper Printing Inc. has bonds outstanding with 19 years left to maturity. The b

Question

Hooper Printing Inc. has bonds outstanding with 19 years left to maturity. The bonds have an 7% 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 $890.20. The capital gains yield last year was - 10.98%.

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? Round your answer to two decimal places.

c) For the coming year, what is the expected capital gains yield?

Explanation / Answer

a) Yield to Maturity

Face value (F) = $1,000

Current price (P) = $890.20

Annual coupon rate = 7%

Maturity = 19 years

Coupon Interest (C) = $1,000/7% = $70

Approximately Yield to Maturity = (C + ((F - P)/Maturity))/((F + P)/2) = ($70 + (($1,000 - $890.2)/19))/(($1,000 + $890.2)/2) = 8.02%

b) Expected Current Yield

Current yield = Annual Income/Current price of the bond = $70/$890.20 = 7.86%

c) Expected Capital Gains Yield

Capital gains yield = Yield to Maturity - Current Yield = 8.02% - 7.86% = 0.15%

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