The return on a bond is equal to the yield to maturity when
A) the holding period is longer than the maturity of the bond.
B) the maturity of the bond is longer than the holding period.
C) the holding period and the maturity of the bond are identical.
D) none of the above.

Question

Quizplus · Accepted Answer

The yield to maturity is the interest rate that equates the present value of future cash flows from the bond to its current market price. Therefore, if the holding period is equal to the maturity of the bond, then all future cash flows (i.e. interest payments and principal repayment) will be received, and the yield to maturity will reflect the total return for the entire holding period. If the holding period is shorter or longer than the maturity of the bond, the realized return will differ from the yield to maturity due to reinvestment risk or interest rate risk.

The Return on a Bond Is Equal to the Yield