University of Central Florida (UCF) FIN3403 Business Finance Practice Exam 1

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What is yield to maturity (YTM) on a bond?

The interest rate of the bond when issued

The total return if the bond is held until maturity

Yield to maturity (YTM) represents the total return anticipated on a bond if it is held until it matures. It encompasses all future cash flows from the bond, including interest payments and any capital gain or loss realized if the bond is purchased at a price different from its face value. YTM is expressed as an annual percentage and takes into account not only the bond's coupon payments but also the difference between the purchase price and the face value.

This concept is significant for investors as it provides a comprehensive measure of the bond's potential profitability, allowing for comparisons across different bonds with varying prices and coupon rates. By summarizing the bond's expected performance over its lifetime, YTM is a crucial metric for anyone considering an investment in bonds.

The annual income earned from the bond

The market price of the bond at any time

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