Chapter 7, Problem 10P

### Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

Chapter
Section

### Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

# CURRENT YIELD, CAPITAL GAINS YIELD, AND YIELD TO MATURITY Hooper Printing Inc. has bonds outstanding with 9 years left to maturity. The bonds have an 8% annual coupon rate and were issued 1 year ago at their par value of $1,000. However, due to changes in interest rates, the bond's market price has fallen to$901.40. The capital gains yield last year was −9 86%. a. What is the yield to maturity? b. For the coming year, what are the expected current and capital gains yields? (Hint: Refer to Footnote 7 for the definition of the current yield and to Table 7.1.) c. Will the actual realized yields be equal to the expected yields if interest rates change? If not, how will they differ?

a.

Summary Introduction

To identify: Yield to maturity (YTM).

Yield to Maturity (YTM): It refers to the rate of interest earned till the maturity of the bond by the bond holder.

Explanation

Given,

Coupon rate is 8%.

Selling price (value of bond) is $901.40. Par value of bond is$1,000.

Maturity is after 9 years.

Yield to maturity (YTM) can be calculated through value of bond.

Formula to calculate present value of bond,

Bond'svalue=t=1NINT(1+rd)<

b.

Summary Introduction

To identify: Current yield.

Current Yield: Current yield is the rate of return earned by the bond holders currently.

c.

Summary Introduction

To identify: Whether the actual realized yield be equal to the expected yields if interest rates change.

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