Question

How does the annualized return you found in the previous two questions compares with the promised yield to maturity of the bond?

Group of answer choices:

a. The annualized return of the doing the sale at 18 months is higher than the YTM which itself is higher than the return of doing the sale after six months

b. The realized returns from doing the sales are lower than the YTM

c. The realized returns from doing the sales are higher than the YTM

d. The three rates are the same

Answer 1

Yield to maturity is like current yield, which divides yearly money inflows from a bond by the market cost of that bond to decide how much cash one would make by purchasing a bond and holding it for one year.

However, in contrast to current yield, YTM represents the current estimation of a bond's future coupon installments. As it were, it factors in the time estimation of cash, while a straightforward current yield figuring doesn't. In that capacity, it is frequently viewed as an increasingly intensive methods for figuring the arrival from a bond.

Calculations of yield to maturity sayst that all coupon installments are reinvested at a similar rate as the bond's present yield and consider the bond's present market value, standard worth, coupon interest rate, and term to maturity. The YTM is just a preview of the arrival on a bond since coupon installments can't generally be reinvested at a similar interest rate. As interest rates rise, the YTM will increment; as interest rates fall, the YTM will diminish.

The correct answer based on above explanation is option d.

d. The three rates are the same