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18 May, 13:54

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%.

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  1. 18 May, 16:43
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    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
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