Answers
- Is the capital gains yield (CGY) earned on Bond A greater than the CGY on Bond C? Explain.
Yes, Capital gains yield (CGY) earned on Bond A greater than the CGY on Bond C because Bond A is a discount bond (coupon rate is less than its yield to maturity); therefore price of bond A will increase with date of maturity approaching. While Bond C is a Premium bond (coupon rate is more than its yield to maturity); therefore price of bond C will decrease with date of maturity approaching.
Capital gains yield (CGY) = (P1 –P0) /P0 *100
- Is the interest yield (IY) on Bond A in year 2 greater than the IY on Bond C in year 2? Explain.
No, the interest yield (IY) on Bond A in year 2 is lower than the IY on Bond C in year 2 because the coupon rate of Bond A is lower than Bond C therefore interest paid on Bond A is lower than Bond C. Therefore the interest yield (IY) on Bond A in year 2 is lower than the IY on Bond C in year 2.
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