Question

I was just looking for an explanation on this question that I missed on an exam:

I purchase a 12 percent coupon bond. Based on my purchase price, I calculate a yield to maturity of 6 percet. If I hold this bond to maturity, then my return on this asset is:

6%

So I know the answer I just need a little explanation. Is your return on asset the same thing as yield to maturity for a coupon bond? Or when does it vary? Thanks.

Answer #1

If you hold to maturity then your return is equal to YTM or yield to maturity you calculated.

YTM is rate at which you discount the cash inflows of the bond. In other way it is your expected rate or discounting rate. Recall NPV concept, where initial outflow is nothing but equal to your investment in bond at par value $1000 (example) and later your inflows are coupon and at end you receive coupon plus principal. The cash inflows are discounted with YTM to get present value of future inflows which makes Bond price. Hence, return on asset is nothing but your YTM or Yield itself.

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