Yield to maturity is defined as:

• A. The rate of return on a bond if held to maturity based on its current price, coupon payments, face value and maturity date.
• B. The annual coupon rate divided by the purchase price
• C. The difference between yield and price
• D. The risk free rate

Answer: (A)

Yield to maturity measures the total return you would earn on a bond if you hold it until it matures, taking into account the price you pay today, the coupon payments you receive, and the amount paid back at the end. It’s essentially the internal rate of return of the bond’s cash flows, assuming coupons are reinvested at the same rate. This aligns with the description of a return earned if the bond is held to maturity based on current price, the coupons, the face value, and the maturity date. The other options don’t capture this full picture: the annual coupon divided by price gives a current yield, which ignores the time value of money and any gain or loss from price movement to face value; the phrase about the difference between yield and price isn’t a standard bond metric; and the risk-free rate is a general benchmark, not the specific return on a given bond.