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Basic Question 8 of 13
The yield to maturity:
B. is the discount rate at which the present value of promised interest and principal payments equals face value.
C. Is the discount rate at which the present value of expected interest and principal payments equals market price.
D. is calculated by the same formula as the internal rate of return (IRR).
A. is the present value of future coupons divided by the present value of the final principal payment.
B. is the discount rate at which the present value of promised interest and principal payments equals face value.
C. Is the discount rate at which the present value of expected interest and principal payments equals market price.
D. is calculated by the same formula as the internal rate of return (IRR).
User Contributed Comments 13
| User | Comment |
|---|---|
| tinku | What's wrong with C? |
| Gina | re C: equals purchase price. hence... = 'market price' is not correct |
| Gina | C and D seem both correct to me as well. |
| vincenthuang | but, isn't market price= purchase price? |
| Orest | Not if you "purchased" it last week. |
| EK65 | it is the interest rate that will make the present value of a bond's cash flows equal to its market price PLUS ACCRUED INTEREST. |
| BADGUY | thanks ek65 |
| Farina | it's a good idea to use the IRR function on the BAII+ to calculate the YTM, takes all the leg-work out of it (unless it's a 30y SA bond that is). |
| CJPerugini | The reason it isn't C is because it says expected interest. You aren't discounting coupon payments based on what you expect to receive but what you are promised. |
| Ericaxu | why not B? |
| houstcarr | C should be correct as well as D. if you call up a bond desk and ask for the yield on xyz bond, they will tell you C. |
| chesschh | C is wrong guys. The notes clearly put in italics the word "promised". So it should be "promised" instead of "expected" |
| davidt87 | Question 3 uses expected and is pretty much defines YTM word for word as C does. |
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Learning Outcome Statements
describe relationships among spot rates, forward rates, yield to maturity, expected and realized returns on bonds, and the shape of the yield curve;
describe how zero-coupon rates (spot rates) may be obtained from the par curve by bootstrapping;
CFA® 2025 Level II Curriculum, Volume 4, Module 26.