Dear all
can someone please tell me if I am wrong or right. I found this question in currently shared subjective portion of fall 2010.

Find out YTM of 1 year 12% coupon bond selling at $130. (Face value of bond = $100).(Marks: 3)

The point here is on obvious basis price is $130 and its paying us only 100 + 12 = $112 after one year which of course is a loss. and even on solving the equation

YTM =( FV/ PV ) -1
we get an answer i.e ( - 0.14 ) showing a loss
Am I doing it right??
Pls comment.....


Solution:
Current yield = yearly coupon payment/price paid
Current yield = 12/130
Current yield = 0.0923
Current yield = 9.23%

Capital Gain or Loss = 130 – 100/ 100
Capital Gian or loss = 30/100 = 0.3 loss above the face value

Now,
Current yield – Capital loss
=9.23 – 0.3
= 8.93

As we know
Bond Price > Face Value:
130>100
Coupon Rate > Current Yield > Yield to Maturity
12% > 9.25% > 8.93%

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