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Current Yield Capital Gains Yield Total Return: Solution

The document discusses a bond issued by the Washington Corporation on January 1, 2005 that had a par value of PHP 1,000, a 12% coupon rate, and matured in 30 years on December 31, 2034 with semi-annual coupon payments. It then asks the reader to: A) Calculate the bond's yield to maturity on the date of issue. B) Calculate the bond's price on January 1, 2010 if interest rates fell to 10%. C) Calculate the bond's current yield, capital gains yield, and total return on January 1, 2010 given the price determined in part B.

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Triechia Laud
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112 views1 page

Current Yield Capital Gains Yield Total Return: Solution

The document discusses a bond issued by the Washington Corporation on January 1, 2005 that had a par value of PHP 1,000, a 12% coupon rate, and matured in 30 years on December 31, 2034 with semi-annual coupon payments. It then asks the reader to: A) Calculate the bond's yield to maturity on the date of issue. B) Calculate the bond's price on January 1, 2010 if interest rates fell to 10%. C) Calculate the bond's current yield, capital gains yield, and total return on January 1, 2010 given the price determined in part B.

Uploaded by

Triechia Laud
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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LAUD, TRIECHIA

BSACC 3A
MODULE 6: Assignment 6

The Washington Corporation issued a new series of bonds on January 1, 2005.


The bonds were sold at par (Php 1000); had a 12% coupon, and mature in 30
years, on December 31, 2034. Coupon payments are made semi-annually (on June
30 and December 31).

A. What was the YTM on January 1, 2005?


B. What was the price of the bonds on January 1, 2010, 5 years later,
assuming the interest rates had fallen to 10%?
C. Find the current yield, capital gains yield, and total return on
January 1, 2010, given the price as determined in Part b?

A 12%
B Php 1,182.56
C
Current yield 10.15%
Capital gains yield -0.15%
Total return 10%

SOLUTION:

A. Washington Corporations bond is sold at par; therefore the original YTM


equalled the coupon rate which is 12%.

50
120/2 1000
V B =∑ t
+
B. t=1 .10 1.10 50
(1+ ) (1+ )
2 2

1 1 1000
= 60 [ − 50 ]+
0.05 .05 (1+ .05) (1+.05)
50

= Php 1,182.56

C. Current Yield= Annual Coupon Payment / Price


= 120/1,182.56
= 0.1015
= 10.15%

o Capital Gains Yield= Total Return – Current Yield


= 10% - 10.15%
= -0.15%
o Total Return= Current Yield + Capital Gains Yield
= 10.15% + (-.015%)
= 10%

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