What is yield to maturity (YTM) in bonds?

• A. The bond's current yield based on annual coupon divided by current price.
• B. The bond's yield to call, if the issuer can call the bond.
• C. The total return the bondholder would receive if held to maturity, considering coupons and price paid.
• D. The total return anticipated if the bond is held to maturity, considering coupon payments and price paid.

Answer: (D)

Yield to maturity captures the total return you would earn if you hold the bond until it matures. It combines the cash you receive from all coupon payments with the effect of buying the bond at some price and receiving the face value at maturity. In other words, it’s the single rate that equates the bond’s future cash flows (coupons and final payment) to your initial investment, assuming you reinvest coupons at the same rate. The option that describes this as the total return anticipated if the bond is held to maturity, considering coupon payments and price paid, is the best fit. This differs from the current yield, which only looks at annual coupons divided by the current price, and from yield to call, which applies only if the bond can be called before maturity.