   Chapter 7, Problem 10P Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

Solutions

Chapter
Section Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

CURRENT YIELD, CAPITAL GAINS YIELD, AND YIELD TO MATURITY Pelzer Printing Inc. has bonds outstanding with 9 years left to maturity. The bonds have a 9% 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$910.30. The capital gains yield last year was -8.97%. 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 6 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 determine: Yield to maturity (YTM).

Introduction:

Yield to Maturity (YTM) refers to the total return expected on the bond till it matures.

Explanation

Given information:

Coupon rate is 9% or 0.09; selling price (value of bond) is $910.30, par value of bond is$1,000 and the maturity is after 9 years.

Compute yield to maturity:

b)

Summary Introduction

To determine: Current yield and capital gain yields.

Introduction:

The annual return earned by the current price and annual coupon payment is termed as current yield and any appreciation on the investments made on the capital assets are capital gain yield.

c)

Summary Introduction

To identify: Whether the actual realized yield be equivalent to the expected yields if there is a change in interest rates.

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