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 $908.30. The capital gains yield last year was - 9.17%. 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

Let's tackle "B" first. 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]. Now "C". Current yield will be the same regardless of the change in interest rates. Unrealized Capital Gains will be higher if interest rates go lower and lower if interest rates rise. Now A. The current yield to maturity is the sum of the rates mentioned in B above. I'm calling this up out of a 25 year old memory, so check with your text book to see if I got it. Hope it helps.

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