Question

A Tesla coupon bond with a face value of $1,000 has a coupon rate of 6% with annual coupons and it will mature in 5 years. If it is currently trading at $813.5, what is its yield-to-maturity? Round to the tenth of a percent (e.g., 4.32% = 4.3) [Hint: Use Excel's "rate" function as explained in the text. Make sure you set the cell to show decimal places.l

Answer 1

The Yield to maturity of (YTM) of the Bond

• The Yield to maturity of (YTM) of the Bond is the discount rate at which the Bond’s price equals to the present value of the coupon payments plus the present value of the Face Value/Par Value
• The Yield to maturity of (YTM) of the Bond is the estimated annual rate of return expected by the bondholders for the bond assuming that the they hold the Bonds until it’s maturity period/date.
• The Yield to maturity of (YTM) of the Bond is calculated using financial calculator as follows (Normally, the YTM is calculated either using EXCEL Functions or by using Financial Calculator)

Variables	Financial Calculator Keys	Figure
Par Value/Face Value of the Bond [$1,000]	FV	1,000
Coupon Amount [$1,000 x 6.00%]	PMT	60
Market Interest Rate or Yield to maturity on the Bond	1/Y	?
Maturity Period/Time to Maturity [5 Years]	N	5
Bond Price [-$813.5]	PV	-813.5

We need to set the above figures into the financial calculator to find out the Yield to Maturity of the Bond. After entering the above keys in the financial calculator, we get the annual yield to maturity (YTM) on the bond = 11.05%”

“Hence, the Yield to maturity of (YTM) of the Bond will be 11.1%”

(Rounded to the nearest tenth percent)