Question

14. What is Yield-to-Maturity? Select one:

a. The annualized total return that a bond offers new buyers - assuming that the bond never defaults.

b. The annualized interest rate that a bond pays out each year (as a percentage of its current price) if it does not default.

c. The interest that a bond pays each year as a percentage of its face value rather than its current market price.

d. A measure of the amount of interest rate risk (also known as price risk) that a bond has.

e. A measure of the amount of reinvestment rate risk that a bond has.

Answer 1

Option (b) is incorrect. This is because the amount company pays each year is based on coupon rate and coupon rate as percentage of price would give current yield on bond and not yield to maturity.

Option (c) is incorrect. This is because the amount of interest paid by company as percentage of its face value is coupon rate of bond and not yield to maturity.

Option (d) and (e) is part of interest rate risk and reinvestment risk which bond has and it is not referred as yield to maturity.

Yield to maturity on bond is the total return earned by investor on bond if the bond is held till maturity and there is no default on payment for bond.

Thus, option (a) is correct.