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    Question

    Which of the following describes the most significant

    technical difference between theĀ Current YieldĀ and theĀ Yield to Maturity (YTM)Ā of a bond?
    A Current Yield considers the time value of money, while YTM does not. Correct Answer Incorrect Answer
    B YTM accounts for the reinvestment of coupon payments and capital gains/losses, whereas Current Yield only considers annual coupon income relative to the market price. Correct Answer Incorrect Answer
    C Current Yield is a statutory measure mandated by SEBI, while YTM is an optional market measure. Correct Answer Incorrect Answer
    D YTM is only used for Zero-Coupon Bonds, while Current Yield is used for all debt instruments. Correct Answer Incorrect Answer
    E Current Yield is always higher than YTM for bonds trading at a discount. Correct Answer Incorrect Answer

    Solution

    Current YieldĀ is calculated by dividing the annual coupon by the current market price, ignoring the time value of money and the eventual gain or loss on principal. Conversely,Ā YTMĀ is a more comprehensive measure that reflects the total return anticipated if the bond is held until maturity, incorporating the current price, par value, coupon payments, time to maturity, and the assumption that all coupons areĀ reinvestedĀ at the same rate.

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