A Heights Inc.bonds have a coupon rate of 7%,a yield to maturity of 10%,a face value of $1,000,and mature in 10 years.Which of the following statements is MOST correct?

Question

Quizplus · Accepted Answer

The yield to maturity (YTM) is the rate of return an investor will earn by holding the bond until maturity. In this case, the YTM is 10%, which means that an investor who purchases the bond today and holds it until maturity will earn a return of 10% per year. The coupon rate of 7% is the interest rate that the bond pays annually, based on the face value of $1,000. However, the coupon rate is not the same as the YTM, which takes into account the bond's price, coupon payments, time to maturity, and other factors. Therefore, an investor who sells the bond after one year may earn a different return than the coupon rate or YTM, depending on the prevailing market conditions and interest rates at that time.