Finance Quiz: Yield To Maturity
20 questions · exam conditions
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Yield To MaturityQuestion 1 of 20

A 15-year bond with an 8% annual coupon and $1,000 par value is currently priced to yield 8%. If its yield to maturity immediately rises to 9%, the bond's price will decrease by approximately:

$8.00
$80.85
$91.95
$100.00
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Finance Quiz

Finance Quiz: Yield To Maturity

Practice Yield To Maturity in Finance with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

What this quiz covers

This quiz focuses on Yield To Maturity, giving you a quick way to practice the rules, question types, and explanations that matter most for Finance.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

All questions

Question 1

A 15-year bond with an 8% annual coupon and $1,000 par value is currently priced to yield 8%. If its yield to maturity immediately rises to 9%, the bond's price will decrease by approximately:

  1. $8.00
  2. $80.85 (correct answer)
  3. $91.95
  4. $100.00
Explanation: This is a multi-step problem. First, determine the initial price. Since the coupon rate (8%) equals the YTM (8%), the bond is priced at par: $1,000. Second, calculate the new price with the higher YTM. Using a financial calculator with N=15, I/Y=9, PMT=80, FV=1000, the new price (PV) is $919.15. Finally, calculate the price decrease: $1,000 - $919.15 = $80.85.

Question 2

The issuer of a 10-year bond with a 7% coupon experiences a sudden, unexpected credit rating upgrade from a major rating agency. Assuming no other market changes, what is the most likely immediate impact on the bond's market price and its yield to maturity (YTM)?

  1. Price will decrease and YTM will increase.
  2. Price will increase and YTM will decrease. (correct answer)
  3. Price will decrease and YTM will decrease.
  4. Price will increase and YTM will increase.
Explanation: A credit rating upgrade signifies a decrease in the perceived default risk of the issuer. With lower risk, investors will demand a lower rate of return to hold the bond. This lower required return is the bond's new, lower yield to maturity (YTM). There is an inverse relationship between a bond's price and its YTM. As the YTM decreases, the present value of the bond's future cash flows increases, causing its market price to rise.

Question 3

A bond's price is quoted at 102.5. It has a 6% coupon paid semi-annually and 8 years remaining to maturity. Which of the following statements is correct?

  1. The bond's yield to maturity is greater than its current yield.
  2. The bond's current yield is greater than its coupon rate.
  3. The bond's yield to maturity is less than its coupon rate. (correct answer)
  4. The bond's coupon rate is less than its current yield.
Explanation: A price quote of 102.5 means the bond is trading at 102.5% of its par value, or $1,025. Since the price is above par, the bond is trading at a premium. For any premium bond, there is a fixed relationship between its yields: Coupon Rate > Current Yield > Yield to Maturity. Based on this, the yield to maturity (YTM) must be less than the coupon rate of 6%.

Question 4

A 15-year bond with an 8% annual coupon and $1,000 par value is currently priced to yield 8%. If its yield to maturity immediately rises to 9%, the bond's price will decrease by approximately:

  1. $8.00
  2. $80.85 (correct answer)
  3. $91.95
  4. $100.00
Explanation: This is a multi-step problem. First, determine the initial price. Since the coupon rate (8%) equals the YTM (8%), the bond is priced at par: $1,000. Second, calculate the new price with the higher YTM. Using a financial calculator with N=15, I/Y=9, PMT=80, FV=1000, the new price (PV) is $919.15. Finally, calculate the price decrease: $1,000 - $919.15 = $80.85.

Question 5

An investor buys a 10-year, 7% annual coupon bond at par value. For the investor's realized yield to be exactly equal to the 7% yield to maturity promised at purchase, which condition must be met?

  1. The bond must be sold prior to maturity after interest rates have fallen.
  2. The issuer's credit rating must be upgraded before the bond matures.
  3. All coupon payments must be reinvested at a rate of 7% until the bond matures. (correct answer)
  4. The market value of the bond must remain at par for its entire life.
Explanation: The yield to maturity (YTM) is the promised rate of return only if two key conditions are met: 1) the bond is held to maturity, and 2) all coupon payments are reinvested at a rate equal to the original YTM. If the coupons are reinvested at a different rate, the investor's actual, or realized, yield will differ from the YTM calculated at the time of purchase. This is known as reinvestment risk.

Question 6

A bond's yield to maturity is 5.5%. If the general market expectation is that interest rates will become significantly more volatile in the future, how will this affect the required YTM on a newly issued, otherwise identical bond?

  1. The required YTM will be lower, because investors will pay a premium for bonds in a volatile market.
  2. The required YTM will be higher, because investors will demand more compensation for increased interest rate risk. (correct answer)
  3. The required YTM will be unaffected, as it is determined solely by coupon, price, and maturity.
  4. The required YTM will be lower for long-term bonds but higher for short-term bonds.
Explanation: Increased volatility of interest rates means greater uncertainty and greater price risk for bondholders. Rational investors are risk-averse and will demand a higher return to compensate them for bearing this additional risk. This additional compensation is reflected in a higher risk premium, which increases the overall required yield to maturity for a new bond issuance.

Question 7

A bond's price is quoted at 102.5. It has a 6% coupon paid semi-annually and 8 years remaining to maturity. Which of the following statements is correct?

  1. The bond's yield to maturity is greater than its current yield.
  2. The bond's current yield is greater than its coupon rate.
  3. The bond's yield to maturity is less than its coupon rate. (correct answer)
  4. The bond's coupon rate is less than its current yield.
Explanation: A price quote of 102.5 means the bond is trading at 102.5% of its par value, or $1,025. Since the price is above par, the bond is trading at a premium. For any premium bond, there is a fixed relationship between its yields: Coupon Rate > Current Yield > Yield to Maturity. Based on this, the yield to maturity (YTM) must be less than the coupon rate of 6%.

Question 8

An investor purchases a 20-year, 6% annual coupon bond at a price that gives it a yield to maturity of 8%. The investor holds the bond for one year, during which market interest rates for comparable bonds fall to 7%. Assuming the investor sells the bond after one year, the investor's realized one-year holding period return will be:

  1. equal to the original yield to maturity of 8%.
  2. less than the coupon rate of 6%.
  3. greater than the original yield to maturity of 8%. (correct answer)
  4. equal to the new market interest rate of 7%.
Explanation: This is a multi-step problem. First, calculate the purchase price (PV) with N=20, I/Y=8, PMT=60, FV=1000, which is $803.64. Second, calculate the selling price one year later (PV) with N=19, I/Y=7, PMT=60, FV=1000, which is 899.34.Theone−yearreturnis(EndingPrice−BeginningPrice+Coupon)/BeginningPrice=(899.34. The one-year return is (Ending Price - Beginning Price + Coupon) / Beginning Price = (899.34 - $803.64 + $60) / $803.64 = $155.70 / $803.64 ≈ 19.38%. This return is significantly greater than the original YTM of 8% due to the capital gain from falling interest rates.

Question 9

A 10-year bond with a $1,000 face value and a 7% coupon is issued at par. Five years later, the bond's yield to maturity (YTM) has fallen to 5%. Which of the following statements about the bond's characteristics at that time (five years after issuance) is most accurate?

  1. The bond is trading at a discount, and its current yield is less than 5%.
  2. The bond is trading at a premium, and its current yield is greater than 7%.
  3. The bond is trading at par, and its current yield is equal to its coupon rate.
  4. The bond is trading at a premium, and its current yield is between 5% and 7%. (correct answer)
Explanation: Five years after issuance, the bond has 5 years remaining to maturity. Since its coupon rate (7%) is greater than its current yield to maturity (5%), the bond must be trading at a premium (price > $1,000). For a premium bond, the yields are ordered as follows: Coupon Rate > Current Yield > YTM. Therefore, the current yield must be between the 7% coupon rate and the 5% YTM.

Question 10

A 30-year callable bond with an 8% coupon is issued at par. The bond is callable in 10 years at $1,050. Five years after issuance, market interest rates have dropped significantly, and the bond is now trading at $1,250. For an investor considering purchasing the bond today, which yield calculation is the most relevant for decision-making?

  1. Yield to maturity, because it measures the return if the bond is held until its 30-year final maturity date.
  2. Yield to call, because the bond is trading at a significant premium and is likely to be called by the issuer. (correct answer)
  3. Current yield, as it provides the best measure of the bond's annual income relative to its price.
  4. Coupon rate, because the 8% annual payment is the only guaranteed cash flow from the bond.
Explanation: The bond is trading at a significant premium (1,250)tobothitsparvalue(1,250) to both its par value (1,000) and its call price ($1,050). This is because its 8% coupon is much higher than current market rates. The issuer has a strong economic incentive to call the bond at the first opportunity (in 5 more years) and refinance at a lower rate. Therefore, an investor buying the bond today should assume it will be called, making the Yield to Call the most realistic and relevant measure of potential return.

Question 11

Two bonds, Bond A and Bond B, are identical in all respects (coupon rate, par value, credit quality) except for their maturity. Bond A matures in 5 years and Bond B matures in 25 years. If the general level of market interest rates rises by 150 basis points, what is the most likely impact on the bonds' yields and prices?

  1. The YTM of both bonds will increase by approximately 150 basis points, but the price of Bond B will fall more than the price of Bond A. (correct answer)
  2. The YTM of Bond B will increase by more than 150 basis points, while the YTM of Bond A will increase by less.
  3. The YTM of both bonds will increase by approximately 150 basis points, but the price of Bond A will fall more than the price of Bond B.
  4. The YTM of both bonds will increase by approximately 150 basis points, and their prices will fall by the same percentage amount.
Explanation: When market interest rates rise, the yield to maturity (YTM) required by investors for all comparable bonds also rises. Thus, the YTM for both bonds will increase by approximately 150 basis points (1.5%). Due to interest rate risk, longer-maturity bonds are more sensitive to changes in interest rates. Therefore, the price of Bond B (25-year maturity) will experience a larger percentage decrease than the price of Bond A (5-year maturity).

Question 12

A corporation issues two bonds on the same day with the same maturity date. Bond A is a standard non-callable bond. Bond B is identical to Bond A in all respects except that it is callable by the issuer at any time after five years. An investor purchasing these bonds at issuance should expect that:

  1. Bond B will have a lower price and a higher yield to maturity than Bond A. (correct answer)
  2. Bond B will have the same price and yield to maturity as Bond A.
  3. Bond B will have a higher price and a lower yield to maturity than Bond A.
  4. Bond B's price will be higher than Bond A's, but its YTM will be lower or higher depending on inflation.
Explanation: When evaluating bonds with embedded options, you need to understand how these features affect investor compensation. A callable bond gives the issuer the right to redeem the bond before maturity, which creates additional risk for investors. The call option represents a disadvantage to bondholders because issuers typically call bonds when interest rates fall below the bond's coupon rate. This means investors face reinvestment risk - they'll receive their principal back early and must reinvest at lower prevailing rates. Additionally, the bond's price appreciation is limited (called "price compression") because as interest rates fall, the likelihood of early redemption increases. Since Bond B carries this additional call risk that Bond A doesn't have, investors will demand compensation in the form of a higher yield. To provide this higher yield at issuance, Bond B must be priced lower than Bond A. This makes answer A correct - Bond B will have both a lower price and higher yield to maturity. Answer B is wrong because identical bonds with different risk profiles cannot have the same pricing. Answer C gets the relationship backwards - the callable bond cannot command a premium price when it offers less favorable terms to investors. Answer D incorrectly suggests inflation determines the yield relationship, when the call feature itself drives the pricing difference regardless of inflation expectations. Study tip: Remember "CHIP" - Callable bonds have Compensation (higher yields), Heightened risk, Inferior price appreciation, and Price discounts compared to non-callable equivalents.

Question 13

Consider a bond with a coupon rate of 5% trading at a discount. Which of the following provides the best conceptual breakdown of its yield to maturity (YTM)?

  1. The coupon rate minus an amortization of the bond's discount.
  2. The current yield plus the annualized capital gain from the price accreting to par value. (correct answer)
  3. The current yield minus the annualized capital loss from the price declining to par value.
  4. The risk-free rate plus a credit spread, but excluding any capital appreciation.
Explanation: The total return from a discount bond held to maturity comes from two sources: the coupon payments and the capital gain as the bond's price increases (accretes) towards its par value at maturity. The YTM incorporates both. The current yield (Annual Coupon / Price) captures the first part. The remainder of the YTM is the annualized capital gain the investor will receive by holding the bond until it matures at par.

Question 14

An investor purchases a 20-year, 6% annual coupon bond at a price that gives it a yield to maturity of 8%. The investor holds the bond for one year, during which market interest rates for comparable bonds fall to 7%. Assuming the investor sells the bond after one year, the investor's realized one-year holding period return will be:

  1. equal to the original yield to maturity of 8%.
  2. less than the coupon rate of 6%.
  3. greater than the original yield to maturity of 8%. (correct answer)
  4. equal to the new market interest rate of 7%.
Explanation: This is a multi-step problem. First, calculate the purchase price (PV) with N=20, I/Y=8, PMT=60, FV=1000, which is $803.64. Second, calculate the selling price one year later (PV) with N=19, I/Y=7, PMT=60, FV=1000, which is 899.34.Theone−yearreturnis(EndingPrice−BeginningPrice+Coupon)/BeginningPrice=(899.34. The one-year return is (Ending Price - Beginning Price + Coupon) / Beginning Price = (899.34 - $803.64 + $60) / $803.64 = $155.70 / $803.64 ≈ 19.38%. This return is significantly greater than the original YTM of 8% due to the capital gain from falling interest rates.

Question 15

A zero-coupon bond with a face value of $1,000 and 7 years to maturity is currently trading for $713. What is the bond's effective annual yield to maturity?

  1. 4.15%
  2. 4.95% (correct answer)
  3. 5.71%
  4. 6.25%
Explanation: For a zero-coupon bond, the price formula is P=FV(1+YTM)nP = \frac{FV}{(1+YTM)^n}. We need to solve for YTM. ( 713 = \frac{1000}{(1+YTM)^7} ). Rearranging gives ( (1+YTM)^7 = \frac{1000}{713} \approx 1.4025 ). Taking the 7th root of both sides gives 1+YTM=(1.4025)17≈1.04951+YTM = (1.4025)^{\frac{1}{7}} \approx 1.0495. Therefore, YTM ≈ 1.0495 - 1 = 0.0495, or 4.95%.

Question 16

A corporation issues two bonds on the same day with the same maturity date. Bond A is a standard non-callable bond. Bond B is identical to Bond A in all respects except that it is callable by the issuer at any time after five years. An investor purchasing these bonds at issuance should expect that:

  1. Bond B will have a lower price and a higher yield to maturity than Bond A. (correct answer)
  2. Bond B will have the same price and yield to maturity as Bond A.
  3. Bond B will have a higher price and a lower yield to maturity than Bond A.
  4. Bond B's price will be higher than Bond A's, but its YTM will be lower or higher depending on inflation.
Explanation: When evaluating bonds with embedded options, you need to understand how these features affect investor compensation. A callable bond gives the issuer the right to redeem the bond before maturity, which creates additional risk for investors. The call option represents a disadvantage to bondholders because issuers typically call bonds when interest rates fall below the bond's coupon rate. This means investors face reinvestment risk - they'll receive their principal back early and must reinvest at lower prevailing rates. Additionally, the bond's price appreciation is limited (called "price compression") because as interest rates fall, the likelihood of early redemption increases. Since Bond B carries this additional call risk that Bond A doesn't have, investors will demand compensation in the form of a higher yield. To provide this higher yield at issuance, Bond B must be priced lower than Bond A. This makes answer A correct - Bond B will have both a lower price and higher yield to maturity. Answer B is wrong because identical bonds with different risk profiles cannot have the same pricing. Answer C gets the relationship backwards - the callable bond cannot command a premium price when it offers less favorable terms to investors. Answer D incorrectly suggests inflation determines the yield relationship, when the call feature itself drives the pricing difference regardless of inflation expectations. Study tip: Remember "CHIP" - Callable bonds have Compensation (higher yields), Heightened risk, Inferior price appreciation, and Price discounts compared to non-callable equivalents.

Question 17

A portfolio manager is considering a 12-year bond with a $1,000 par value and a 5% coupon paid annually, currently trading at $890. Which of the following statements correctly ranks the bond's yields?

  1. Current Yield > Yield to Maturity > Coupon Rate
  2. Coupon Rate > Current Yield > Yield to Maturity
  3. Yield to Maturity > Coupon Rate > Current Yield
  4. Yield to Maturity > Current Yield > Coupon Rate (correct answer)
Explanation: The bond is trading at $890, which is less than its 1,000parvalue,soitisadiscountbond.Foranydiscountbond,thereisafixedrelationshipbetweenitsyields.Thecouponrateisgivenas51,000 par value, so it is a discount bond. For any discount bond, there is a fixed relationship between its yields. The coupon rate is given as 5%. The current yield is the annual coupon payment divided by the market price: (1000 * 0.05) / $890 = $50 / $890 ≈ 5.62%. The yield to maturity (YTM) for a discount bond is always the highest of the three yields because it includes both the current yield and the annualized capital gain from the price accreting to par. Therefore, the correct order is YTM > Current Yield > Coupon Rate.

Question 18

The issuer of a 10-year bond with a 7% coupon experiences a sudden, unexpected credit rating upgrade from a major rating agency. Assuming no other market changes, what is the most likely immediate impact on the bond's market price and its yield to maturity (YTM)?

  1. Price will decrease and YTM will increase.
  2. Price will increase and YTM will decrease. (correct answer)
  3. Price will decrease and YTM will decrease.
  4. Price will increase and YTM will increase.
Explanation: A credit rating upgrade signifies a decrease in the perceived default risk of the issuer. With lower risk, investors will demand a lower rate of return to hold the bond. This lower required return is the bond's new, lower yield to maturity (YTM). There is an inverse relationship between a bond's price and its YTM. As the YTM decreases, the present value of the bond's future cash flows increases, causing its market price to rise.

Question 19

Two bonds, Bond A and Bond B, are identical in all respects (coupon rate, par value, credit quality) except for their maturity. Bond A matures in 5 years and Bond B matures in 25 years. If the general level of market interest rates rises by 150 basis points, what is the most likely impact on the bonds' yields and prices?

  1. The YTM of both bonds will increase by approximately 150 basis points, but the price of Bond B will fall more than the price of Bond A. (correct answer)
  2. The YTM of Bond B will increase by more than 150 basis points, while the YTM of Bond A will increase by less.
  3. The YTM of both bonds will increase by approximately 150 basis points, but the price of Bond A will fall more than the price of Bond B.
  4. The YTM of both bonds will increase by approximately 150 basis points, and their prices will fall by the same percentage amount.
Explanation: When market interest rates rise, the yield to maturity (YTM) required by investors for all comparable bonds also rises. Thus, the YTM for both bonds will increase by approximately 150 basis points (1.5%). Due to interest rate risk, longer-maturity bonds are more sensitive to changes in interest rates. Therefore, the price of Bond B (25-year maturity) will experience a larger percentage decrease than the price of Bond A (5-year maturity).

Question 20

A 30-year callable bond with an 8% coupon is issued at par. The bond is callable in 10 years at $1,050. Five years after issuance, market interest rates have dropped significantly, and the bond is now trading at $1,250. For an investor considering purchasing the bond today, which yield calculation is the most relevant for decision-making?

  1. Yield to maturity, because it measures the return if the bond is held until its 30-year final maturity date.
  2. Yield to call, because the bond is trading at a significant premium and is likely to be called by the issuer. (correct answer)
  3. Current yield, as it provides the best measure of the bond's annual income relative to its price.
  4. Coupon rate, because the 8% annual payment is the only guaranteed cash flow from the bond.
Explanation: The bond is trading at a significant premium (1,250)tobothitsparvalue(1,250) to both its par value (1,000) and its call price ($1,050). This is because its 8% coupon is much higher than current market rates. The issuer has a strong economic incentive to call the bond at the first opportunity (in 5 more years) and refinance at a lower rate. Therefore, an investor buying the bond today should assume it will be called, making the Yield to Call the most realistic and relevant measure of potential return.