The correct answer is: C. yield to maturity
The yield to maturity (YTM) is the rate of return an investor expects to earn on a bond if they hold it until maturity. It is calculated by taking the present value of all the bond’s future cash flows (coupon payments and principal repayment) and dividing it by the bond’s price.
The yield to maturity is a more accurate measure of a bond’s return than the coupon rate, because it takes into account the time value of money. The coupon rate is simply the annual interest payment that the bond issuer makes to the bondholder. However, the coupon rate does not take into account the fact that the bondholder will receive the coupon payments in the future, and that the value of money decreases over time.
The yield to maturity is also a more accurate measure of a bond’s return than the yield to call, which is the rate of return an investor expects to earn if they hold the bond until it is called by the issuer. The yield to call is calculated by taking the present value of all the bond’s future cash flows (coupon payments and principal repayment) and dividing it by the bond’s price, assuming that the bond will be called at the first call date.
However, the yield to call is only an accurate measure of a bond’s return if the bond is actually called. If the bond is not called, the investor will earn a higher return than the yield to call.
Therefore, the yield to maturity is the most accurate measure of a bond’s return. It takes into account the time value of money and the fact that the bondholder may receive the principal repayment at a future date.
Here is a brief explanation of each option:
- A. Yield to earning is not a commonly used term. It could refer to the earnings yield, which is the ratio of a company’s earnings per share to its share price. However, the earnings yield is not a measure of a bond’s return.
- B. Yield to investors is also not a commonly used term. It could refer to the yield to maturity, which is the rate of return an investor expects to earn on a bond if they hold it until maturity. However, the yield to investors is not a specific term that is used in the financial industry.
- D. Yield to return is not a commonly used term. It could refer to the total return on a bond, which is the sum of the bond’s coupon payments and capital gains (or losses). However, the total return is not a measure of a bond’s yield.