The Current Yield Tends to Overstate a Bond's Total Return

question 81

Multiple Choice

The current yield tends to overstate a bond's total return when the bond sells for a premium because:

• A) the bond's price will decline each year.
• B) coupon payments can change at any time.
• C) bonds selling for a premium have low default risk.
• D) taxes must be paid on the current yield.

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Definitions:

Internal Rate

Commonly denotes the internal rate of return (IRR), the discount rate at which the net present value (NPV) of all cash flows from a specific project is zero.

Cash Operating

The process dealing with the direct cash flows from business operations, emphasizing a company's liquidity in the short term.

Required Rate

The minimum expected return by investors to compensate for the risk of an investment, often used in capital budgeting.

Useful Life

The estimated period over which a fixed asset is expected to be usable by an organization, impacting its depreciation calculations.