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Pelzer Printing Inc
Pelzer Printing Inc. has bonds outstanding with 9 years left to maturity. The bonds have a 9% 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 $910.30. The capital gains yield last year was -8.97%.
- What is the yield to maturity? Do not round intermediate calculations. Round your answer to two decimal places.
2.For the coming year, what is the expected current yield? Do not round intermediate calculations. Round your answer to two decimal places.
3.For the coming year, what is the expected capital gains yield? Do not round intermediate calculations. Round your answer to two decimal places.
Expert Solution
1). We can calculate the yield to maturity by using the following formula in excel:-
=rate(nper,pmt,-pv,fv)
Here,
Rate = Yield to maturity
Nper = 9 periods
Pmt = Coupon payment = $1,000*9% = $90
PV = $910.30
FV = $1,000
Substituting the values in formula:
= rate(9,90,-910.30,1000)
= 10.59%
2). Computation of the expected current yield:-
Current yield = Annual coupon payment / Current price of the bond
= $1,000*9% / $910.30
= 9.89%
3). Computation of the expected capital gain yield:-
Capital gain yield = Yield to maturity - Current yield
= 10.59% - 9.89%
= 0.71%
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