Dear Mr. Berko:
I recently bought $10,000 of Tesla stock, and I hope I didn't make a mistake, because it doesn't pay a dividend. I also intend to buy some of Tesla's 5.375 percent bonds, which are due in 2025. Ten of them will cost me $8,600, and they have a current yield of 6.25 percent. So my combined Tesla investments will yield about 3 percent. Could you explain, in simple English, how to figure the yield to maturity? My stockbroker's eyes glazed over when I asked him, and no one in his office knows how to calculate it.
-MC, Joliet, Ill.
Dear MC:
The yield to maturity, noted as "YTM" on a discount bond (one that sells for less than $1,000), is always higher than the current yield, or CY. Don't try to think it through just yet. Just follow the bouncing ball.
1) Assume that on Aug. 13, 2017, you purchased 10 of Tesla's 5.375 percent bonds at par value ($1,000 each). You'll get a check every six months for $269.37. So in 12 months, you will have $538.74. That's a 5.375 percent current yield on a $10,000 investment. Tesla promises to return the entire $10,000 to you when these bonds mature. Certainly, a 5.375 percent CY is much better than you could get from a seven-year certificate of deposit from an American bank. You could get higher CD yields from banks in Venezuela, Botswana, Bangladesh and Mongolia and from Orient Commercial Joint Stock Bank-a Vietnamese bank jointly owned with BNP Paribas-and they also promise to return your money to you.
2) Today, because of serious profit and sales concerns at Tesla, the 5.375 percent bonds, which come due at par seven years from now, have fallen in price. These Tesla bonds can be bought all day, all night, Marianne, at a 14 percent discount to par. That's why, as you said, a $10,000 face value purchase of Tesla's 5.375 percent bonds will cost you $8,600 today. The reason the CY is 6.25 percent instead of 5.375 percent is that the bonds still pay a fixed amount of interest, $537.50. That amount divided by $8,600 equals 6.25 percent. But you'll still collect $269.37 in interest every six months, and you will earn this $538.74 every year until 2025. Get it? Got it? Good!
3) Now I'm going to give you the AARP version of yield to maturity. You will pay $8,600 for bonds that mature in seven years. And Tesla promises to give you $10,000 in 2025. So in seven years, assuming you hold the bonds to maturity and assuming Tesla redeems the bonds at par, you'll have a capital gain of $1,400. That will be an average annual gain of $200 a year. Your YTM is the 6.25 percent CY plus the average annual gain in value of the bonds-expressed as a percentage-as they approach maturity ($200 divided by $8,600), which is 2.32 percent. That's 8.57 percent-my very rough calculation. The exact numbers involve an incredibly sophisticated formula that even Carl Gauss might not understand. And I'd wager a sack of road apples to a bushel of turnips that there's not a broker in Joliet who'd know this calculation.
I didn't like Tesla (TSLA-$336) when it traded at $65 in 2012. I didn't like TSLA at $150 in 2013 or at $225 in 2014. I haven't cared for TSLA in the past three years as it has risen by another 160-plus points. However, I think CEO Elon Musk is a genius, so smooth that he could persuade a shark to become a vegetarian. But in my opinion, TSLA is not an investment; it's a bleeding speculation with zero earnings. The company burns through money with the efficiency of a crematorium. Musk has persuaded lots of Americans to buy TSLA. I'm not one of them, though I'd buy one of his cars.
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Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at mjberko@yahoo.com. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.
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Published: Tue, Jul 03, 2018
