Question

An investor purchases a Tesla bond for $1,200 ($1,000 principal, paid semi-annually, maturity of 4 years, 6.5% coupon rate). What is the new price of the bond if the yield-to-maturity of the bond goes down 1.0%? Still assume 4 years until maturity.

Group of answer choices $1,233 $1,200 $1,158 $1,244

Answer 1

Given about tesla's bond

Purchase price = $1200

Face value = $1000

coupon rate = 6.5% paid semiannually

So, semiannual coupon payment = (6.5%/2) of 1000 = $32.50

years to maturity = 4 years

So, current Yield to maturity of the bond can be calculated on financial calculator using following values:

FV = 1000

PV = -1200

N = 2*4 = 8

PMT = 32.5

compute for I/Y, we get I/Y = 0.674

So, semiannual yield on the bond = 0.674%

So, YTM = 2*0.674 = 1.348%

When YTM goes down by 1%, new YTM = 1.348 - 1 = 0.348%

So, use following value to compute price of the bond

FV = 1000

N = 8

PMT = 32.5

I/Y = 0.348/2 = 0.174

solve for PV, we get PV = -1244

So, the new price of the bond = $1244

Option D is correct.