The discount rate that makes the present value of a bond's payments equal to its price is termed the
Question
The discount rate that makes the present value of a bond's payments equal to its price is termed the
Solution
The discount rate that makes the present value of a bond's payments equal to its price is termed the Yield to Maturity (YTM).
Here's why:
The Yield to Maturity (YTM) is the total return anticipated on a bond if it is held until it matures. YTM is considered a long-term bond yield expressed as an annual rate. The calculation of YTM takes into account the current market price, par value, coupon interest rate, and time to maturity. It is assumed that all coupons are reinvested at the same rate. Sometimes, this rate is also referred to as the "discount rate" which makes the present value of all future cash flows equal to the current market price of the bond.
Similar Questions
Consider a simple one-year bond promising the payment of a fixed amount to the bond-holder on maturity. In this case, Group of answer choices the interest rate and the price of the bond are positively related assuming that the payment on maturity is unchanged the interest rate on the bond is the rate of discount which makes the present value of the payment on maturity equal to the price of the bond the interest rate on the bond is equal to the present value of the payment on maturity the interest rate on the bond is equal to the price of the bond if the maturity payment is constant.
A bond will issue at a discount when:Multiple Choicethe market rate of interest is more than the stated rate of interest.the market rate of interest is less than the stated rate of interest.the market rate of interest is equal to the stated rate of interest.
What is the relationship between the interest rate and the price of the bond?
If the stated rate of a bond is higher than the market interest rate:Group of answer choicesThe stated rate will increaseThe coupon payment will increaseThe bond will be priced above the face valueThe bond will trade at a discount
A discount or premium on bonds payable can be defined by which of the following statements?Group of answer choicesThe difference between the interest rate and the market price of the bond.The difference between the market price on the issue date and the face value.The market rate of interest on the date of the bond issuance.The difference between the call price and the face value of the bond.
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