Question

1.The Broomfield Bricklayers has a bond issue outstanding with an annual coupon rate of 9%. The par value of the bond is $1,000. Calculate the current yield of the bond if the bond’s current price was $974. See pages 174–176. 2. Refer to Additional Problem 1. If the sale price of this bond was $1,103 a year later, what is the capital gains yield? 3. Refer to Additional Problems 1 and 2. What would the total expected return for the bond be? 4. Refer to the bond valuation calculation on page 176 of the text. Using a financial calculator, solve for the present value of the 10-year bond on its issue date. The bond has a par value of $1,000, coupon rate of 10%, and a discount rate of 8%.

Answer 1

Answer:

answer 1.   9.24%

answer 2.   13.24%

Answer 3.  22.48%

Answer 4.   $1,134.20

Explanation:

answer 1

Coupon amount = Face value * coupon rate

=1000*9%

=$90

current price of bond=$974

Current yield = Coupon amount/current price of bond

=90/974

=0.09240246407 or 9.24%

answer 2.

sale price after one year = 1103

purchase price or opening price = 974

Capital gains yield = (Sale price - Purchase price)/Purchase price

=(1103-974)/974

=0.1324435318 or 13.24%

Answer 3

One year coupon received = $90

Expected return of bond = Current yield + Capital gains yield

=0.09240246407+0.1324435318

=0.2248459959 or 22.48%

Another formula:

Expected return on bond = (Coupon received + sale price - purchase price)/Purchase price

(90+1103-974)/974

=0.2248459959

or 22.48%

Answer 4

Calculator inputs

I/Y (discount rate)= 8%

N (number of periods ) = 10

PMT (coupon amount) = 1000*10% =100

FV (face value) = 1000

press CPT and then -PV

Answer will be $1,134.20