Debt securities
⏱ ~3-min readAceMark Guide
What this topic is really about
Yield to maturity (YTM) is a comprehensive return calculation that assumes all semi-annual coupon payments are successfully reinvested at the same rate as the current YTM until the bond matures. If coupons are not reinvested, or are reinvested at a lower rate, the investor's actual realized yield will be lower than the stated YTM.
Zero-coupon bonds do not make periodic interest payments; instead, they are issued at a deep discount and pay their full face value at maturity. This makes Option A incorrect, as traditional bonds pay semi-annual coupons, whereas zero-coupon bonds provide return solely through capital appreciation.
See the mechanism
Annual interest is calculated by multiplying the par value by the coupon rate, which yields fifty dollars ($1,000 * 5%). A diagram for this topic isn't available yet — the worked example below walks the same reasoning step by step.
An exam-style question, fully explained
A bond with par $1,000 and 5% coupon pays annual interest of:
- Identify what the question tests: A bond with par $1,000 and 5% coupon pays annual interest of:.
- Annual interest is calculated by multiplying the par value by the coupon rate, which yields fifty dollars ($1,000 * 5%).
- Option C is incorrect because $1,050 represents the total return of principal plus interest at maturity, rather than just the annual interest payment itself.
Traps the examiner sets
- Option C is incorrect because $1,050 represents the total return of principal plus interest at maturity, rather than just the annual interest payment itself.
- Zero-coupon bonds do not make periodic interest payments; instead, they are issued at a deep discount and pay their full face value at maturity.
Test your recall
Answer each from memory — you'll see instantly whether you're right and why.
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