1. 30.

Components of bond returns [LO 7.2] Bond P is a premium bond with a coupon rate of 9 per cent. Bond D has a coupon rate of 5 per cent and is currently selling at a discount. Both bonds make annual payments, have a YTM of 7 per cent and have 10 years to maturity.

What is the current yield for Bond P? For Bond D? If interest rates remain unchanged, what is the expected capital gains yield over the next year for Bond P? For Bond D? Explain your answers and the interrelationships among the various types of yields.