iec what is correct and incorrect for the work you have pleted so far. work you
ID: 2791877 • Letter: I
Question
iec what is correct and incorrect for the work you have pleted so far. work you have done so far is correct, you may not have completed everything value: 10.00 points A bond has a par value of $1,000, a time to maturity of 20 years, and a coupon rate of 7.30% with interest paid annually. If the current market price is $730, what will be the approximate capital gain of this bond over the next year if its yield to maturity remains unchanged? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Capital gain 4.60Explanation / Answer
Current Year:
Face Value = $1,000
Current Price = $730
Annual Coupon = 7.30%*$1,000 = $73
Time to Maturity = 20 years
Let Annual YTM be i%
$730 = $73 * PVA of $1 (i%, 20) + $1,000 * PV of $1 (i%, 20)
Using spreadsheet, i = 10.60%
So, Annual YTM = 10.60%
Next Year:
Face Value = $1,000
Annual Coupon = $73
Time to Maturity = 19 years
Annual YTM = 10.60%
Price next year = $73 * PVA of $1 (10.60%, 19) + $1,000 * PV of $1 (10.60%, 19)
Price next year = $73 * (1 - (1/1.1060)^19) / 0.1060 + $1,000 / 1.1060^19
Price next year = $734.58
Capital Gain = Price next year - Current price
Capital Gain = $734.58 - $730.00
Capital Gain = $4.58
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