Final answer:
The yield to maturity for Stainless Tubs' bond, with a coupon rate of 6% payable semiannually and currently selling for $817, is the discount rate that equates the bond's current price with the present value of its remaining cash flows. It is not directly given but would require solving a present value equation, likely using financial software or a calculator, and will be higher than the coupon rate due to the bond selling for less than face value.
Step-by-step explanation:
Yield to Maturity Calculation
The question asks about calculating the yield to maturity (YTM) of a bond. The Stainless Tubs company bond has a 6% coupon rate, payable semiannually, matures in 11 years, and has a face value of $1,000. Currently, these bonds sell for $817.
To calculate the YTM, it's important to account for the semiannual interest payments, the discount at which the bond is purchased (less than its face value), and the time to maturity. We must solve for the discount rate that equates the present value of all future cash flows from the bond (interest payments and the repayment of face value) to the price paid for the bond, which is $817. While the information provided does not directly calculate the YTM, it gives us insight into the relationship between bond prices, interest rates, and yields.
When interest rates rise, as in the example provided, the price of existing bonds fall to compensate for the lower interest rates they offer compared to new issues. Similarly, when interest rates fall, bonds previously issued at higher interest rates will sell for more than face value. The bond's yield includes interest payments and any capital gains or losses realized upon sale or maturity.
This YTM question involves a mathematical finance concept that requires some detailed calculations usually performed through financial calculators or spreadsheet software since it involves solving for the rate in a present value equation. The YTM is higher than the coupon rate given the bond's discounted price.
Note: The exact YTM is not calculated here as it requires a financial calculator or iterative numerical methods to solve.