Question

Ezzell Enterprises' noncallable bonds currently sell for $1,198.50. They have a 5-year maturity, semi-annual coupon rate of 12.00%, and a par value of $1000. What is the bond's capital gain or loss yield?

Step 1

Before we get into the question, let's understand the following equation:

Yield to maturity of the bond = Current yield + Capital Gain (Loss) yield

Hence, Cpital Gain (Loss) yield of the bond = Yield to maturity of the bond - Current yield.

Step 2

Yield to maturity, Y can be calculated using the RATE function in excel. Inputs are:

Frequency of coupon payment = Semi annually

Hence, the period here is half year.

Period = no. of periods to maturity = nos. of half years in 5 years = 2 x 5 = 10

PMT = Payment per period = semi-annual coupon rate of 12.00% = 12% / 2 x Face value = 6% x $ 1,000 = 60

PV = - Current price of thebond = - 1198.50.

FV = Future Value = par value = 1000.

Step 3

Hence, yield to maturity per period = Semi annual yield to maturity = RATE (Period, PMT, PV, FV) = RATE (10, 60, -1...

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