Question

Many people often equate the interest rate on a bond with its return. Why is this a dangerous thing to do?

Answer 1

Yield to maturity is the return on a bond assuming the bondholder holds the bond for the full maturity. Rate of return is the return over a specific holding period that takes into account not just the coupon rate but the price change.

Yield to maturity a better measure of the interest rate on a bond than is the coupon rate because the coupon rate takes into account the present value adjusted yield on the purchase price.

Yield to maturity is the interest rate that equates the present value of future payments of an asset with its current value whereas in other case the time value of money is ignored.