Consider a bond that makes coupon payments in the following manner: no coupon pa

Question

Consider a bond that makes coupon payments in the following manner: no coupon payments are made for 2 years; after that, the coupon rate will be 5% for 5 years; after that, the coupon rate will be 10% for 8 years. Coupon payments are made annually. The bond matures in 15 years and face value is $12,000. YTM is 5.5%. a. What is the value of the bond? $12902.72 b. What is this year's current yield? What is this year's capital gains yield? c. What are the current yield and capital gains yield in 2 years?

Explanation / Answer

a) value of the bond is sum present value of cash flows associated with bond and present value of terminal value of bond

Computation of value of the bond

Year Cash flows PVF@5.5% PV 1 0          0.948         -    2 0          0.898         -    3 600          0.852     511.0 4 600          0.807     484.3 5 600          0.765     459.1 6 600          0.725     435.1 7 600          0.687     412.5 8 1200          0.652     781.9 9 1200          0.618     741.2 10 1200          0.585     702.5 11 1200          0.555     665.9 12 1200          0.526     631.2 13 1200          0.499     598.3 14 1200          0.473     567.1 15 1200          0.448     537.5 15 12000          0.448 5,375.2 value of the bond $12,903

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