CIFC Exam Dumps | When comparing the current yield and yield-to-maturity of a bond, which statement applies?

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Question 53/103

When comparing the current yield and yield-to-maturity of a bond, which statement applies?

A. Yield-to-maturity accounts for the reinvestment of coupon payments.

B. Yield-to-maturity is based on the current market value of the bond, not the price paid.

C. Capital gains or capital losses are reflected in the current yield calculation.

D. Current yield includes in the calculation the time to maturity.

Correct Answer: A

Explanation
This statement is correct because yield-to-maturity (YTM) is the annualized rate of return of a bond that assumes that all coupon payments are reinvested at the same rate until the bond matures. YTM takes into account the bond's current market price, par value, coupon rate, and time to maturity, and it calculates the compound interest earned on the reinvested coupons. Therefore, YTM reflects the total return of the bond, including both the interest income and the capital gain or loss.
References = Current Yield vs. Yield to Maturity - Investopedia, Yield to Maturity (YTM) - Investopedia, Bond Current Yield Calculator

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