Question

When I purchase a 10 percent coupon bond, I calculate a yield to maturity of 8 percent. If I hold this bond to maturity, then my return on this asset is

A) 10 percent.

B) 8 percent.

C) 12 percent.

D) there is not enough information to determine the return.

Answer 1

YIELD TO MATURITY IMPLIES THAT IF YOU HOLD BOND TILL MATURITY THEN WHATEVER BE THE MARKET RATE, YOU WILL GET RETURN ON ASSET = YTM (YIELD TO MATURITY)

THIS IS BECAUSE IF RATE GOES DOWN, THE PRICE OF BOND WILL INCREASE BUT AS WE PROCEED TOWARDS MATURITY, THE PRICE WILL BE EQUAL TO PAR VALUE. AND IF RATE GOES UP, THE PRICE OF BOND WILL DECREASE, BUT AS WE PROCEED TOWARDS MATURITY, IT WILL BE EQUAL TO PAR VALUE ONLY.

SO IF YOU HOLD ASSET TILL END, YOU WILL REALIZE RETURN EQUAL TO YTM.

SO THE RETURN ON ASSETS WILL BE EQUAL TO 8%

ANSWER : B) 8 PERCENT (Thumbs up please)