Finance HW question.. Due in 1 hr

Seems like you've got this one on your own.

A.

Can you please explain.. How do you know expected capital gains yield? What if it isn't held to maturity? It can go up next month and the investor might have expected that gain

Given that the bond is selling at par, D is incorrect. Selling at a discount means below par, and if yield decreases, price increases.

I really hate the way A is phrased (because you have no idea what you will sell it at and IIRC, cap gains from bonds sold at a discount are treated as interest), but it is probably the best answer. Flake is not trolling you (at least this time.)

I agree with you on eliminating b and c. The current and YTMs are both 9%.

Source: 30 months professional experience in corporate bond analytics. On four beers tonight, and two years out of credit analytics though, so not playing my A game.

You don't know it's A. But b,c, and d are flat out wrong. And the current yield is $90/$1000= 9%, so I agree with you that it's probably not e. So the least incorrect answer is A.

Capital gains yield? Is this a word your professor made up? There's bond appreciation taxed as capital gains, but I've never heard of expected capital gains yield.

Because this is a straight bond bought at par, cap gains will be zero if you hold it to maturity. The coupon payments are interest and the face value you receive at maturity is the repayment of principal.

If you bought the bond at a discount, you would have a gain (face value > price) and if you bought the bond at a premium, you would have a loss (face value price).

http://www.chegg.com/homework-help/questions-and-answers/10-year-corpor…

http://quizlet.com/4808676/finance-exam-1-flash-cards/

Thank me later.

the term "capital gains yield" doesn't ring a bell. as you mentioned, B, C and E are incorrect. D is also incorrect, as you would have to sell at a premium for a lower YTM.

go with A? dunno bro.

Please let us know if you got the question right or if you want someone who has done this on a professional basis to call your professor and tell him he's clueless.***

***: On my fifth beer. I reserve my right to pull the "it was the beer talking" card tomorrow morning.

Actually, the question was written by our TA so that should explain the horrible wording.

I submitted it with A. I agree that it sounds like the least incorrect answer. It now makes sense why it can't be D because I don't think he was asking if the current $1,000 price is considered to be a discount relative to a future price when the YTM goes down.

I think I can make a good argument if A turns out to be wrong.. but I'm confident about it after the explanation you gave

Thanks for the help

Hahaha I'll keep you updated

Let me guess, in the next lesson, he is going to bring out words like "basis point premium over treasuries" instead of Z-spread, and is going to call it "spread to cover default risk after factoring out callability" instead of just saying the OAS.

If he does do something like that, please post back here so we can get a few more yuck-yucks about the fact that PhD candidates say the darnedest things invent the dumbest terms.

A unless you sell it later for a gain. Also, if the maturity "declined" assuming it would be repaid earlier, it would probably sell at a premium.

You just said:

SMKthe par value is $1,000 (which is the current selling price) so there won't be a capital gain when it matures if it's bought at this price.

Also, I know i'm late.

^^^ Also gotta divide by the period that it's held by, at least by the classical meaning of yield.

Again, I worked in credit analytics for 30 months, and I have never heard of "capital gains yield". I have heard of duration, I have heard of convexity. I have heard of oas, oad, z-spread, YTM, YTW, key-rate duration, cds spread, black-karasinski spread, dozens of spreads off of Libor and treasury yields. Not capital gains yield.

This may start to apply when you deal with really funky stuff like callable fixed-to-floats. Even then, it's an obscure aspect of finance that went out with the crash of 2008 when the fixed-to-floats didn't get called.

***head hurts. Maybe I am confusing muni tax treatment with corporates again. The IRS generally tries to follow the same system for everything as long as it eliminates the most egregious abuses of the tax system.