1. Dynamic Systems has an outstanding bond that has a $1,000 par value and 7 percent coupon rate. Interest is paid semiannually. The bond has 11 years remaining until it matures. Today the going interest rate is 10 percent, and it is expected to remain at this level for many years in the future. Compute (a) current yield and (b) capital gains yield that the bond will generate this year.
2. Eight years ago, Over-the-Top Trampolines issued a 15-year bond with a $1,000 par value and a 6 percent coupon rate (interest paid annually). Today the going rate of interest on similar bonds is 6 percent. (a) What is the bond's current value? If the market rate stays at 6 percent for the remainder of the bond's life, what (b) current yield and (c) capital gains yield will bondholders receive during the next two years (i.e., Years 9 and 10)?