A bond has a par value of $1,000,a time to maturity of 10 years,and a coupon rate of 8% with interest paid annually.If the current market price is $750,what is the approximate capital gain yield of this bond over the next year?

Question

Quizplus · Accepted Answer

The capital gain yield is the change in price of the bond divided by the original price. The change in price over the next year will be the difference between the coupon payment and the difference between the market price and the par value, divided by the market price. The coupon payment is $80 (8% of $1,000), the difference between the market price and the par value is $250 ($1,000 - $750), and the market price is $750. Therefore, the capital gain yield is ($80 - $250)/$750 = -0.1733, which is approximately -1.8%. However, since the question asks for the absolute value, the answer is approximately 1.8%, or choice B.

A Bond Has a Par Value of $1,000,a Time to Maturity