Hooper Printing Inc. has bonds outstanding with 9 years left to maturity. The bo
ID: 2814537 • Letter: H
Question
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%.
a. What is the yield to maturity?
b. For the coming year, what are the expected current and capital gain yields?
c. Will the actual realized yields be equal to the expected yields if interest rates change? If not, how will they differ?
(please type answer out) thank you!
Explanation / Answer
a. Yield to maturity = Annual interest [face value - current price / maturity] / {face value + current price /2}
= (1000 * 8%)+ [1000 - 901.4 / 9] / {1000 + 901.4 /2}
=[80 + 10.956] / 950.7
=90.956/ 950.7
=9.69% (approx )
b expected current yield = coupon payment / present value
= $80 / $901.40
= 8.88%
expected cpital gain yields = yield to maturity - expected current yield
= 9.69% - 8.88%
= 0.81%
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