Which of the following are true concerning the distinction between interest rates and returns?
A) The rate of return on a bond will not necessarily equal the interest rate on that bond.
B) The return can be expressed as the difference between the current yield and the rate of capital gains.
C) The rate of return will be greater than the interest rate when the price of the bond falls between time t and time t + 1.
D) The return can be expressed as the sum of the discount yield and the rate of capital gains.

Question

Quizplus · Accepted Answer

The rate of return on a bond includes both the interest received and any capital gains/losses. Therefore, it may not necessarily equal the interest rate on the bond.

Answer: B
 The return on a bond can be expressed as the sum of the current yield (annual interest payment divided by the bond price) and the rate of capital gains (change in bond price over time).

Answer: C
 If the price of a bond falls between time t and time t+1, the yield to maturity (and therefore the rate of return) will increase as the investor is able to buy more income with the same initial investment.

Answer: D
 This statement is incorrect. The discount yield is already included in the current yield, so it should not be added again when calculating the total return.

Which of the Following Are True Concerning the Distinction Between