Which statement about yield to maturity (YTM) is true?

• A. YTM ignores reinvestment of coupons.
• B. YTM equals the annual coupon rate.
• C. YTM is the total return anticipated if the bond is held to maturity, incorporating coupons and price paid.
• D. YTM is determined solely by current price and face value.

Answer: (C)

The main idea is that yield to maturity reflects the total return you would earn if you hold the bond to its maturity, taking into account all future coupon payments and the price you paid for the bond. YTM is the internal rate of return that makes the present value of all expected cash flows (the coupon payments and the final principal repayment) equal to the current price. It also assumes you can reinvest the coupons at the same rate as the YTM, and that there is no default.

That’s why the statement about YTM being the total return if held to maturity, including coupons and price paid, is the correct description. The other statements are off because: YTM does not ignore reinvestment (it assumes reinvestment at YTM), it is not simply the annual coupon rate (it depends on price and time to maturity as well), and it isn’t determined only by current price and face value (the coupon payments and timing of those payments matter too).