Finding current yield, yield to maturity and capital gain yield of bond.
Ten years ago, A Pane in the Glass, Inc. (the major glass manufacturer) raised money by issuing $100 million of $1,000 face value bonds with a 14% coupon paid annually and a maturity of 25 years. The bonds sold at their face value of $1,000 per bond. On the recommendation of your friend, an alumnus of the Fordham AEMBA, you bought one of the bonds. Today, the yield in the market on this bond has dropped to 12%.
Required
a. What annual payment did you, as an original bondholder, receive?
b. What was the yield-to-maturity (YTM) of the bonds at their date of issue?
c. At what price is each bond selling today?
d. Why has the price changed the way it has?
e. Separate the YTM into the current yield and capital gains yield you will receive over the next year if the market rate of 12% does not change.
f. If you were to sell the bond today, what would be your holding-period yield?
g. You decide to keep the bond for one more year and then sell it. How much further would the yield on this bond have to drop for you to earn a holding period yield of 18%?