Wee Beastie Animal Farm bonds have 8 years to maturity and pay an annual coupon at the rate of 5

Accounting Dec 16, 2020

Wee Beastie Animal Farm bonds have 8 years to maturity and pay an annual coupon at the rate of 5.6%. The face value of the bonds is S1.000 The price of the bonds is $1,071.18 to yield 4.52%. What is the capital gain yield on the bonds?
The capital gain yield is: (Select the best choice below.)
A) - 0.65%
B) -0.71%
C) - 0.63%
D) 0.77
E) + 0.83%

Expert Solution

Current yield = Annual coupon payment/ Price of the bond

here,

Annual coupon payment = 5.6% * $1,000

= $56

Price of the bond = $1,071.18

So,

Current yield = 56/ 1,071.18

= 5.23%

Capital gain yield = Yield to maturity - Current yield

= 4.52% - 5.23%

= -0.71%

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