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.
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