Understanding the Expected Rate of Return on Bonds

A

The answer to the question is A. Yield to maturity.

Yield to maturity (YTM) is the expected rate of return on a bond if bought at its current market price and held to maturity. It is the total return anticipated on a bond if it is held until it matures, and all interest payments and principal are received by the investor.

YTM takes into account the bond's current market price, the face value of the bond, the time until maturity, and the coupon rate. The coupon rate is the annual interest payment divided by the face value of the bond.

The YTM calculation includes the interest income that will be earned from holding the bond, as well as any capital gains or losses that will be realized if the bond is sold before maturity.

The current yield (B) is the annual income from a bond divided by its current market price, expressed as a percentage. This measure does not take into account the time to maturity, and it assumes that the bond will be held for only one year.

The coupon yield (C) is the annual interest payment divided by the face value of the bond, expressed as a percentage. This measure also does not take into account the time to maturity, and it assumes that the bond will be held until maturity.

The capital gains yield (D) is the change in the bond's price over a period of time, expressed as a percentage. This measure is not a measure of the expected rate of return on a bond if held to maturity, as it does not take into account the interest income that will be earned from holding the bond.

Therefore, the correct answer is A. Yield to maturity.