A bond has a par value of $1,000, a time to maturity of 10 years, and a coupon rate of 8% with coupon paid annually

Finance Dec 28, 2020

A bond has a par value of $1,000, a time to maturity of 10 years, and a coupon rate of 8% with coupon paid annually. If the current market price is $800, what will be the approximate capital gain of this bond over the next year if its yield to maturity remains unchanged? Report as a % with 2 decimals

Expert Solution

Annual coupon = (8 / 100) * 1000 = 80

Yield to maturity = 11.46%

Keys to use in a financial calculator:

FV 1000

PV -800

N 10

PMT 80

CPT I/Y

Price in 1 year:

Value of bond = Coupon * [1 - 1 / (1 + rate)^periods] / rate + Face value / (1 + rate)^periods

Value of bond = 80 * [1 - 1 / (1 + 0.11462)^9] / 0.13 + 1000 / (1 + 0.11462)^9

Value of bond = 80 * [1 - 0.37658] / 0.11462 + 376.5811

Value of bond = 80 * 5.43901 + 376.5811

Value of bond = $811.8

Capital gain = 811.8 - 800 = 11.80

Capita gain rate = (11.80 / 800) * 100

Capita gain rate = 1.48%

Archived Solution

Unlocked Solution

You have full access to this solution. To save a copy with all formatting and attachments, use the button below.

Already a member? Sign In

Important Note: This solution is from our archive and has been purchased by others. Submitting it as-is may trigger plagiarism detection. Use it for reference only.

For ready-to-submit work, please order a fresh solution below.

Or get 100% fresh solution

Get Custom Quote