All other things equal (ytm = 10%), which of the following has the longest duration?
A) a 30-year bond with a 10% coupon
B) a 20-year bond with a 9% coupon
C) a 20-year bond with a 7% coupon
D) a 10-year zero-coupon bond
Yield to Maturity
Yield to maturity (YTM) of a bond represents the annualized rate of return investors earn if they buy the bond at a specific price and hold it until maturity. In other words, YTM is defined as the interest rate that makes the present value of a bond’s payments equal to its price.
The following assumptions are made while computing YTM.
• The bond is to be held until maturity.
• Both interest and the principal amount should be paid as mentioned in the indenture of the bond.
• The bond should not be called before maturity.
• Bond interest is to be reinvested in the rate of yield to maturity.