Multiple Choice
Which of the following pieces of information is required to determine the value of a stock using the zero-growth (perpetuity) dividend valuation model?
112
views
7. Receivables and Investments
Introduction to Investments in Securities
Multiple Choice
The market-required rate of return on a bond that is held for its entire life is called the:
A
Coupon rate
B
Current yield
C
Yield to maturity (YTM)
D
Discount rate
Verified step by step guidance1
Understand the concept of Yield to Maturity (YTM): Yield to Maturity is the total return anticipated on a bond if it is held until it matures. It considers all coupon payments and the difference between the bond's current price and its face value.
Differentiate between the terms provided: The coupon rate is the annual interest rate paid by the bond issuer, expressed as a percentage of the bond's face value. Current yield is the annual coupon payment divided by the bond's current price. The discount rate is used in present value calculations but is not specific to bonds held to maturity.
Recognize why YTM is the correct answer: YTM accounts for the bond's entire life, including all cash flows (coupon payments and principal repayment) and the time value of money, making it the most comprehensive measure of return for a bond held to maturity.
Relate YTM to market-required rate of return: The market-required rate of return is the rate investors demand based on the bond's risk and market conditions. YTM reflects this rate as it incorporates the bond's price, coupon payments, and maturity value.
Conclude the explanation: Yield to Maturity is the correct term because it represents the market-required rate of return for a bond held until maturity, encompassing all relevant financial factors.
Related Videos
Related Practice
