Question

TESLA, the disruptive car maker, has 7.8 percent coupon bonds on the market with 12 years left to maturity. The bonds have $1,000 face value and make semiannual payments. They currently sell for 101 percent of par. What is the effective annual yield on the bonds?

Answer 1

Given about Tesla's current bond,

Face value = $1000

coupon rate = 7.8% paid semiannually,

So, semiannual coupon payment = (7.8%/2) of 1000 = $39

years to maturity = 12

current price = 101% of face value = $1010

Bonds' Yield can be calculated on financial calculator using following values:

FV = 1000

PV = -1010

N = 2*12 = 24

PMT = 39

Compute for I/Y, we get I/Y = 3.836

=> YTM of the bond = 2*3.836 = 7.67%

Effective annual yield on bond = ((1 + Coupon rate/n)^n) -1 = (1 + 0.078/2)^2 -1 = 7.95%