The discount rate that makes the present value of a bond's payments equal to its price is termed the:
A)Rate of return
B)Yield to maturity
C)Current yield
D)Coupon rate

Question

Quizplus · Accepted Answer

The yield to maturity is the discount rate that makes the present value of a bond's future cash flows (coupons and principal) equal to its price. Therefore, B is the correct answer as it defines the concept of the yield to maturity. A is incorrect because the rate of return can refer to various measures of return, and is not specific to bonds. C is incorrect because the current yield refers only to a bond's annual coupon payment divided by its current market price, and does not take into account the bond's price fluctuations over time. D is incorrect because the coupon rate refers only to a bond's fixed annual interest payment, and does not reflect changes in market conditions that affect the bond's market price.

The Discount Rate That Makes the Present Value of a Bond's