- CFA Exams
- CFA Exam: Level I 2021
- 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**

The yield to maturity ______.

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)

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

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**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. |