CFA Practice Question

There are 490 practice questions for this study session.

CFA Practice Question

Which yield measure is the rate of return required by investors given the risk of the investment in a bond?
A. Market discount rate
B. Yield-to-maturity
C. Spot rate
Explanation: The market discount rate can be used to calculate the present value of cash flows of a bond. It is different from yield to maturity, which is the promised rate of return.

User Contributed Comments 3

User Comment
xboxt Can somebody explain this??
davidt876 I'm with you xboxt. the market discount rate is a market-wide assessment of risk, whereas the yield-to-maturity take into account the specific bond's risk.

Eg: Firm A is under-performing and investors price this into the risk of the firm's bonds, pricing them at discount. So yield-to-maturity has increased, and discount rate remains unchanged.
myron I think the market discount rate is vague here, the market discount rate of the bond is more appropriate. Anyway, yield-to-maturity is definitely wrong as explained by the answer: it assumes investors hold the bond to maturity, and can re-invest coupons at that rate, which is too ideal.
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