Which statement best describes the yield to maturity of a bond?

Which statement best describes the yield to maturity of a bond?

• A. The yield to maturity for a bond is determined by the price of the bond, which is shaped by the supply and demand of the bond market
• B. YTM equals the coupon rate
• C. YTM is fixed at issue
• D. YTM ignores reinvestment risk

Answer: (B)

Yield to maturity is the rate of return you’d earn if you hold the bond to its maturity and reinvest the coupons at that same rate. This measure isn’t fixed at issue; it moves as the bond’s price changes in the market. The bond price, in turn, is driven by supply and demand in the market, so YTM tends to fall when price rises and rise when price falls. The YTM only equals the coupon rate when the bond trades at par (price equals face value). If the price is above par, YTM will be lower than the coupon; if below par, YTM will be higher than the coupon. Also, YTM does not ignore reinvestment risk in the sense that it assumes coupon reinvestment at the YTM rate, so the actual realized return can differ if reinvestment conditions differ. Among the statements, the best description is that YTM is determined by the price of the bond, which is shaped by supply and demand in the bond market.

Yield to maturity is the rate of return you’d earn if you hold the bond to its maturity and reinvest the coupons at that same rate. This measure isn’t fixed at issue; it moves as the bond’s price changes in the market. The bond price, in turn, is driven by supply and demand in the market, so YTM tends to fall when price rises and rise when price falls.

The YTM only equals the coupon rate when the bond trades at par (price equals face value). If the price is above par, YTM will be lower than the coupon; if below par, YTM will be higher than the coupon. Also, YTM does not ignore reinvestment risk in the sense that it assumes coupon reinvestment at the YTM rate, so the actual realized return can differ if reinvestment conditions differ.

Among the statements, the best description is that YTM is determined by the price of the bond, which is shaped by supply and demand in the bond market.