Chapter 6, Problem 17PROB

Summary Introduction

Current price of the bond:

Price of the bond is the present value of the future cash flows received from the bond.

Current yield: It is the ratio of the coupon payment to current price of the bond. It is used to measure the current rate of return earned by the investor from the bonds.

Capital gain: Capital gain is the difference between the yield to maturity and current yield.

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Calculate the current price of the bond as follows:

$\text{Current price}=\frac{\text{Coupon }\times \left(1-{\left(1+\text{Rate}\right)}^{-\text{Periods}}\right)}{\text{Rate}}+\frac{\text{Face value}}{{\left(1+\text{Rate}\right)}^{\text{Periods}}}$

Calculate the current yield as follows:

$\text{Current yield}=\frac{\text{Coupon}}{\text{Current price}}$

Calculate the capital gain yield as follows:

$\text{Capital gain yield}=\text{Yield to maturity}-\text{Current yield}$

D system has outstanding bonds that has face value of $1000 and coupon rate of 7%. Interest is paid semiannually on this bond. Yield to maturity is 10% and remaining time to maturity is 11 years