The interest rate that equates the present value of the cash flow received from a debt instrument with its market price today is theA) simple interest rate.B) discount rate.C) yield to maturity.D) real interest rate.
C) yield to maturity
The correct answer is C) yield to maturity.
The yield to maturity (YTM) is the interest rate that makes the present value of all the future cash flows from a debt instrument – such as bonds or notes – equal to its current market price. This means that if an investor purchases a bond and holds it until maturity and reinvests the interest payments at the same interest rate, the YTM will give them the total rate of return on the investment.
The simple interest rate only calculates interest on the original principal amount, without taking into account the compounding of interest. The discount rate is the rate used to determine the present value of future cash flows. The real interest rate is the nominal interest rate adjusted for inflation.
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