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31 January, 11:06

A bond has a par value of $1,000, a time to maturity of 15 years, and a coupon rate of 9.00% with interest paid annually. If the current market price is $900, what will be the approximate capital gain of this bond over the next year if its yield to maturity remains unchanged?

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  1. 31 January, 11:21
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    The capital gain yield would be 0.34%

    Explanation:

    The rate is computed by using the excel formula of rate as:

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

    where

    nper is number of periods which is 15 years

    pmt = fv * Coupon rate

    = 1,000 * 9%

    = 90

    pv is present value which is $900

    fv is face value which is $1,000

    = Rate (15, 90, - 900, 1000)

    = 10.34%

    The price after 1 year would be:

    By using the excel, it is computed:

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

    = - 900 (10.34%, 14, 90, 1000)

    = $903.06

    The capital gain yield would be:

    Capital gain yield = (Price after 1 year - PV) / PV

    = ($903.06 - $900) / $900

    = 3.06 / 900

    = 0.34%
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