Answer:
Capital Gain Yield = 0.94%
Explanation:
Par Value = $1,000
Current Price = $860
Annual Coupon Rate = 8.60%
Annual Coupon = 8.60% * $1,000
Annual Coupon = $86
Time to Maturity = 10 years
Let annual YTM be i%
$860 = $86 * PVIFA(i%, 10) + $1,000 * PVIF(i%, 10)
Using financial calculator:
N = 10
PV = -860
PMT = 86
FV = 1000
I/Y = 10.98%
Annual YTM = 10.98%
Price Next Year = $86 * PVIFA(10.98%, 9) + $1,000 * PVIF(10.98%, 9)
Price Next Year = $86 * (1 - (1/1.1098)^9) / 0.1098 + $1,000 / 1.1098
Price Next Year = $868.12
Capital Gain Yield = (Price Next Year - Current Price) / Current Price
Capital Gain Yield = ($868.12 - $860) / $860
Capital Gain Yield = 0.0094
Capital Gain Yield = 0.94%