If i is the yield to maturity of a fixed-payment loan,
A)the value of the loan today equals i times the sum of the values of all the loan payments.
B)i equals the present value of the loan payments.
C)the value of the loan today equals the sum of the values of the loan payments.
D)the value of the loan today equals the present value of the loan payments discounted at rate i.

Question

Quizplus · Accepted Answer

The yield to maturity of a fixed-payment loan represents the discount rate that sets the present value of all future loan payments equal to the current value of the loan. Therefore, the value of the loan today equals the present value of the loan payments discounted at rate i. Choice A is incorrect because i is not multiplied by the sum of the values of all the loan payments, but rather used as the discount rate. Choice B is incorrect because i is not equal to the present value of the loan payments, but rather represents the discount rate. Choice C is incorrect because the sum of the values of the loan payments does not account for the time value of money and the discount rate.

If I Is the Yield to Maturity of a Fixed-Payment