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7 October, 00:47

A 10-year corporate bond has an annual coupon payment of 8%. The bond is currently selling at par ($1,000). Which of the following statement is NOT correct? The bond's yield to maturity is 8%. The bond's current yield is 8%. If the bond's yield to maturity remains constant, the bond's price will remain at par. The bond's capital gain yield is 8%.

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  1. 7 October, 01:08
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    The bond's capital gain yield is 8% is not correct as capital gain yield is 0%

    Explanation:

    The bond yield to maturity is 8%, which can be proved by computing yield using rate formula in excel

    =rate (nper, pmt,-pv, fv)

    nper is 10 years

    pmt is 8%*$1000=$80

    pv and fv are both %=$1000

    =rate (10,80,-1000,1000) = 8.00%

    The current yield is the same as yield to maturity of 8%

    If the bond's yield remains at 8%, there is no doubt that the price will remain at $1000 par value which can proved with pv formula in excel

    =pv (rate, nper, pmt, fv)

    =pv (8%,10,80,1000) = $1000

    The bond capital gain yield is zero since capital yield relates to movement in prices of the bond

    capital gain yield = current price-face value/current price

    = (1000-1000) / 1000=0%
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