Question

A bond has a par value of $10,000 and currently has a price of $9,500. The bond pays a rate of 5% over 5 years. Calculate the current yield. The same bond started the year with a price of $9,500 and is expected to be sold for $9,750. What is the Capital Gains Yield

Answer 1

Answer:

The current yield is 5.2% and capital gain is 2.63%.

Explanation:

The par value of bond = $10000

Current price = $9500

Annual coupan payment = 5%

Annual coupan  payment = 10000 × 5% = $500

Now calculate the current yield.

The current yield =  annual coupon payment / current price  

The current yield =   500 / 9500 = 0.052 or 5.2%  

Now calculate the capital gain. In the question, it says that it starts at $9500 so its original price is 9500.

Capital gain yield = (9750 – 9500) / 9500 = 0.0263 or 2.63%