Hooper Printing has bonds outstanding with 13 years left to maturity. You are en

Question

Hooper Printing has bonds outstanding with 13 years left to maturity. You are entitled to 15 more interest payments since the bonds have an 8% annual coupon. Par value at issue is $1000. However, due to changes in interest rates, the bond's market price has risen to $991.50 since last year. The capital gain yield last year was +6.25%.

A) how much is the yield to maturity for this bond?

B) For the current year, how much is the current yield?

C) For the current year, how much is the capital gains yield?

D) If the bond was callable in year 18 ( 5 years from now) at a 10% premium, how much is the yield to call if you bought today?

Explanation / Answer

A)

Calculate the yield to maturity for this bond:

N = 13, PV = $991.50, PMT = $80, FV = $1,000

I/YR = YTM = 8.11%

Therefore, YTM is 8.11%

B)

For the current year, how much is the current yield:

CY = $80/$991.50

= 8.069%

C)

Calculate the capital gains yield:

= YTM – CY

= 8.11% - 8.069%

= 0.041%

D)

N = 18, PV = $991.50, PMT = $80, FV = $1,100 ($1,000*1.1)

I/YR = YTM = 9.14% (Using financial calculator)

Therefore, YTM is 9.14%

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