Question

Which one of the following statements is true of a bond's yield to maturity?

A) The yield to maturity of a bond is the discount rate that makes the present value of the coupon and principal payments equal to the price of the bond.
B) It is the annual yield that the investor earns if the bond is held to maturity, and all the coupon and principal payments are made as promised.
C) A bond's yield to maturity changes daily as interest rates increase or decrease.
D) All of the above are true.

Answer 1

The correct answer is D) All of the above, as a bond's yield to maturity is a comprehensive measure that includes the discount rate equalling the present value of payments to the bond's price, the annual yield earned to maturity, and its daily changes with interest rates.

Step-by-step explanation:

Regarding the true statement about a bond's yield to maturity, D) All of the above are true represents the correct answer. This term encapsulates several aspects:

• The yield to maturity is the discount rate that makes the present value of the coupon and principal payments equal to the price of the bond.
• It represents the annual yield that an investor earns if the bond is held to maturity, assuming all the coupon and principal payments are made as scheduled.
• The yield to maturity can change daily as the market interest rates fluctuate.