Q. Bond A is a premium bond with a 12 percent coupon. Bond B is a 4 percent coupon bond currently trading at a discount. Both bonds make annual coupon payments, have a YTM of 6 percent, and have six years to maturity.
a. What is the current yield for Bond A and for Bond B?
b. If interest rates remain unchanged, what is the expected capital gains yield, stated as a percentage, over the next year for Bond A and for Bond B?
c. Briefly explain the interrelationship among the answers.