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The annual yield to maturity (AYTM) of the Builtrite bonds is at 5.5% for 10 years with a $1,000 par value and the current price of $1,044 is A. 4.9%.
The annual yield to maturity (AYTM) is the total return expected from a bond if the bond is held till maturity.
The AYTM rate is the rate at which all future expected cash flows are discounted to find out the current value or the price of the bond.
We can use the following Yield to Maturity formula to calculate the AYTM.
Yield to Maturity = [Annual Interest + {(FV-Price)/Maturity}] / [(FV+Price)/2]
Annual Interest = Annual Interest Payout by the Bond = $55 ($1,000 x 5.5%)
FV = Face Value of the Bond = $1,000
Price = Current Market Price of the Bond = $1,044
Maturity = Time to Maturity = 10 years
= {$55 + ($1,000 - $1,044)/10} / {($1,000 + $1,044)/2}
= $55 + -4.4 / 1,022
= 50.6/1,022
= 4.95%
We can also use an online finance calculator to check the calculated value above as follows:
N (# of periods) = 10
I/Y (Interest per year) = 4.95%
PMT (Periodic Payment) = $55 ($1,000 x 5.5%)
FV (Future Value) = $1,000
Results:
PV = $1,044
Sum of all periodic payments = $550 ($55 x 10)
Total Interest $503.44
A. 4.9%
B. 5.1%
C. 5.3%
D. 5.5%
Thus, the annual yield to maturity (AYTM) of the Builtrite bonds is at 5.5% for 10 years with a $1,000 par value and the current price of $1,044 is A. 4.9%.
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