Bond valuation, problem 16, Meade Corporation

This one is a bit tricky.  However, the same problem with different numbers is on page 125 of Brigham and Daves (2010).  Current yield is defined as the coupon payment dvidided by the current price.  The capital gains yield can be obtained two different ways.

  1. Compute the bond price so you can compute the current yield.  Once you have the the current yield and yield to maturity you can utilize the expression: YTM = CY + CGY where CGY is the capital gains yield.
  2. Compute the bond price one year from now.  To do that, reduce N by one year (or two semi-annual periods in this case) and re-calculate PV.  Then the change of PV from the old N to the one-year less N is your CGY.

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