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Homework answers / question archive / 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
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
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%
