Current yield, capital gains yield, and yield to maturity Hooper Printing Inc. h
ID: 2735516 • Letter: C
Question
Current yield, capital gains yield, and yield to maturity
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%.
What is the yield to maturity? Round your answer to two decimal places.
%
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.
%
Will the actual realized yields be equal to the expected yields if interest rates change? If not, how will they differ?
As rates change they will cause the end-of-year price to change and thus the realized capital gains yield to change. As a result, the realized return to investors will differ from the YTM.
As long as promised coupon payments are made, the current yield will change as a result of changing interest rates. However, changing rates will cause the price to change and as a result, the realized return to investors will differ from the YTM.
As long as promised coupon payments are made, the current yield will not change as a result of changing interest rates. However, changing rates will cause the price to change and as a result, the realized return to investors should equal the YTM.
As long as promised coupon payments are made, the current yield will change as a result of changing interest rates. However, changing rates will cause the price to change and as a result, the realized return to investors should equal the YTM.
As long as promised coupon payments are made, the current yield will change as a result of changing interest rates. However, changing rates will not cause the price to change and as a result, the realized return to investors should equal the YTM.
Explanation / Answer
Answer: N= 9,FV= $1,000,PV= -$901.40,PMT= 8% * $1,000 = $80
implying that YTM = I/YR=9.691%
Answer: Expected Current Yield= $80/$901.40 = 8.875%
Answer: Expected Capital Gains Yield= 9.691% - 8.875% = 0.816%
Answer: Expected capital gains yield can be found as the difference between YTM and the current yield.
CGY = YTM - CY = 9.691% - 8.875% = 0.816%.
Alternatively, you can solve for the capital gains yield by first finding the expected price next year.
N = 8, I = 9.6911, PMT = 80, FV = 1000
PV = -$908.76. VB = $908.76.
Hence, the capital gains yield is the percent price appreciation over the next year.
CGY = (P1 - P0)/P0 = ($908.76 - $901.40)/$901.40 = 0.816%.
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