LAUD, TRIECHIA

BSACC 3A
MODULE 6: Assignment 6

The Washington Corporation issued a new series of bonds on January 1, 2005.

The bonds were sold at par (Php 1000); had a 12% coupon, and mature in 30
years, on December 31, 2034. Coupon payments are made semi-annually (on June
30 and December 31).

A. What was the YTM on January 1, 2005?

B. What was the price of the bonds on January 1, 2010, 5 years later,
assuming the interest rates had fallen to 10%?
C. Find the current yield, capital gains yield, and total return on
January 1, 2010, given the price as determined in Part b?

A 12%
B Php 1,182.56
C
Current yield 10.15%
Capital gains yield -0.15%
Total return 10%

SOLUTION:

A. Washington Corporations bond is sold at par; therefore the original YTM

equalled the coupon rate which is 12%.

50
120/2 1000
V B =∑ t
+
B. t=1 .10 1.10 50
(1+ ) (1+ )
2 2

1 1 1000
= 60 [ − 50 ]+
0.05 .05 (1+ .05) (1+.05)
50

= Php 1,182.56

C. Current Yield= Annual Coupon Payment / Price

= 120/1,182.56
= 0.1015
= 10.15%

o Capital Gains Yield= Total Return – Current Yield

= 10% - 10.15%
= -0.15%
o Total Return= Current Yield + Capital Gains Yield
= 10.15% + (-.015%)
= 10%