Current yield, capital gains yield, and yield to maturity Hooper Printing Inc. h

Question

Current yield, capital gains yield, and yield to maturity Hooper Printing Inc. has bonds outstanding with 10 years lef o matu y. The bonds have an 7% annual coupon rate an changes in interest rates, the bond's market price has fallen to $810.40. The capital gains yield last year was-18.96%. were ed 1 year ago he ar alue of How eve due to 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. 1% 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. b. Bond valuation Bond X s noncallable and has 20 years to maturity, a 11% annual coupon and a $1,000 par value Your required return on Bond S 8 %, a f yo buy t ou plan to old t or ears ou (and the market have expectations that in 5 years the yield to maturity on a 15-year bond with similar risk will be 9%. How much should you be willing to pay for Bond X today? Hint: You will need to know how much the bond will be worth at the end of 5 years.) Round your answer to the nearest cent.

Explanation / Answer

a) Expected current yield for the coming year = 70/810.40 = 8.64% Answer b) Expected price of the bond at EOY 5 = 1000/1.09^15+110*(1.09^15-1)/(0.09*1.09^15)= $ 1,161.21 Price that can be paid today is the PV of the price after 5 years and the annual dividend of $110 discounted at the required rate of return of 8% = 1161.21/1.08^5+110*(1.08^5-1)/(0.08*1.08^5) = $ 1,229.50 Answer: $1,229.50

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