What do approximate methods for yield to maturity rely on?

What do approximate methods for yield to maturity rely on?

• A. Approximate methods rely on current yield and expected price change to maturity.
• B. Approximate methods rely on credit rating only.
• C. Approximate methods rely on the coupon rate alone.
• D. Approximate methods ignore price changes.

Answer: (A)

Approximate methods for yield to maturity estimate total return by splitting it into two parts: the income from coupons relative to price today (the current yield) and the anticipated change in price as the bond moves toward its maturity value (the capital gain or loss). Since a bond’s price generally drifts toward its par value by maturity, the expected price change over the remaining years can be annualized and added to the current yield to yield a rough YTM. This is why the approach relies on current yield and the expected price change to maturity. Credit rating, coupon rate alone, or ignoring price movements don’t capture the full return components that YTM represents.

Approximate methods for yield to maturity estimate total return by splitting it into two parts: the income from coupons relative to price today (the current yield) and the anticipated change in price as the bond moves toward its maturity value (the capital gain or loss). Since a bond’s price generally drifts toward its par value by maturity, the expected price change over the remaining years can be annualized and added to the current yield to yield a rough YTM. This is why the approach relies on current yield and the expected price change to maturity. Credit rating, coupon rate alone, or ignoring price movements don’t capture the full return components that YTM represents.