The formula for the yield to maturity, i, on a discount bond is
A)i = (Face value - Discount price)/Discount price.
B)i = (Discount price - Face value)/Discount price.
C)i = (Face value - Discount price)/Face value.
D)i = (Discount price - Face value)/Face value.

Question

Quizplus · Accepted Answer

The yield to maturity (YTM) on a discount bond is calculated as the annualized return based on the bond's coupon payments, face value, and its current price. The correct formula for YTM on a discount bond, where the bond is purchased at a discount to its face value, is i = (Face value - Discount price)/Discount price. This formula correctly represents the return on investment for the bondholder, as it calculates the ratio of the profit (the difference between the face value and the purchase price) to the initial investment (the purchase price).

The Formula for the Yield to Maturity, I, on a Discount