CFA Practice Question

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CFA Practice Question

The yield to maturity ______.

A. is the present value of future coupons divided by the present value of the final principal payment
B. is the discount rate at which the present value of promised interest and principal payments equals face value
C. Is the discount rate at which the present value of expected interest and principal payments equals market price
D. is calculated by the same formula as the internal rate of return (IRR)
Correct Answer: D

User Contributed Comments 13

User Comment
tinku What's wrong with C?
Gina re C: equals purchase price.
hence... = 'market price' is not correct
Gina C and D seem both correct to me as well.
vincenthuang but, isn't market price= purchase price?
Orest Not if you "purchased" it last week.
EK65 it is the interest rate that will make the present value of a bond's cash flows equal to its market price PLUS ACCRUED INTEREST.
BADGUY thanks ek65
Farina it's a good idea to use the IRR function on the BAII+ to calculate the YTM, takes all the leg-work out of it (unless it's a 30y SA bond that is).
CJPerugini The reason it isn't C is because it says expected interest. You aren't discounting coupon payments based on what you expect to receive but what you are promised.
Ericaxu why not B?
houstcarr C should be correct as well as D. if you call up a bond desk and ask for the yield on xyz bond, they will tell you C.
chesschh C is wrong guys. The notes clearly put in italics the word "promised". So it should be "promised" instead of "expected"
davidt87 Question 3 uses expected and is pretty much defines YTM word for word as C does.
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