Pelzer Printing Inc. has bonds outstanding with 24 years left to maturity. The bonds have a 12% annual coupon rate and were issued 1 year ago at their par value of $1,000. However, due to changes in interest rates, the bond's market price has fallen to $920.70. The capital gains yield last year was -7.93%.

YTM = 13.09 %

Expected current yield = 13.0336%

Expected capital gains yield = 0.062%

Explanation:

given data

future value FV = $1,000

market price PV = 920.70

time period N = 24 years

annual coupon rate = 12 %

solution

we get  here first PMT that is

PMT = Future value  × coupon rate

PMT = 0.12 × 1000

PMT = 120

we use here excel function to get the rate that is express as

R = Rate(N,PMT,PV,FV)    ...................1

so we get here

rate(24,-120,920.70,-1000)

rate = 0.130956

YTM = 13.09 %

and

here Expected current yield will be

Expected current yield = Coupon ÷ Bond price   ..............2

Expected current yield = 120 ÷ 920.70

Expected current yield = 13.0336%

and

Expected capital gains yield will be

Expected capital gains yield = YTM - Expected current yield ...............3

Expected capital gains yield = 13.0956 - 13.0336

Expected capital gains yield = 0.062%

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