Questions: How does yield-to-maturity reflect total return components? a. The yield-to-maturity is not connected to the price or coupon rate. b. The yield-to-maturity reflects the price appreciation/depreciation to par as a percentage rate of return. c. The yield-to-maturity combines the coupon income and price appreciation/depreciation to par into a single return measure. d. The yield-to-maturity reflects the coupon income as a percentage of par.

How does yield-to-maturity reflect total return components? a. The yield-to-maturity is not connected to the price or coupon rate. b. The yield-to-maturity reflects the price appreciation/depreciation to par as a percentage rate of return. c. The yield-to-maturity combines the coupon income and price appreciation/depreciation to par into a single return measure. d. The yield-to-maturity reflects the coupon income as a percentage of par.
Transcript text: How does yield-to-maturity reflect total return components? a. The yield-to-maturity is not connected to the price or coupon rate. b. The yield-to-maturity reflects the price appreciation/depreciation to par as a percentage rate of return. c. The yield-to-maturity combines the coupon income and price appreciation/depreciation to par into a single return measure. d. The yield-to-maturity reflects the coupon income as a percentage of par.
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Solution

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The answer is the third one (or C): The yield-to-maturity combines the coupon income and price appreciation/depreciation to par into a single return measure.

Explanation for each option:

a. The yield-to-maturity is not connected to the price or coupon rate.

  • This is incorrect. Yield-to-maturity (YTM) is indeed connected to both the price of the bond and the coupon rate. It is a comprehensive measure that takes into account the bond's current market price, its par value, the coupon interest payments, and the time remaining until maturity.

b. The yield-to-maturity reflects the price appreciation/depreciation to par as a percentage rate of return.

  • This is partially correct but incomplete. While YTM does reflect the price appreciation or depreciation to par, it also includes the coupon income. Therefore, it is not just about the price change.

c. The yield-to-maturity combines the coupon income and price appreciation/depreciation to par into a single return measure.

  • This is correct. YTM is a measure that combines both the annual coupon payments and any capital gain or loss that the investor will realize if the bond is held until maturity. It provides a single, comprehensive rate of return.

d. The yield-to-maturity reflects the coupon income as a percentage of par.

  • This is incorrect. The coupon income as a percentage of par is known as the current yield, not the yield-to-maturity. YTM includes both the coupon income and the capital gain or loss.

Summary: Yield-to-maturity (YTM) is a comprehensive measure that combines the annual coupon income and the capital gain or loss (price appreciation/depreciation) to par into a single return measure. Therefore, the correct answer is C.

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