- CFA Exams
- CFA Level I Exam
- Study Session 14. Fixed Income (1)
- Reading 44. Introduction to Fixed-Income Valuation
- Subject 1. Bond Prices and the Time Value of Money

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**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.

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**User Contributed Comments**
3

User |
Comment |
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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. |