Canadian Securities Course (CSC) Level 1 Practice Exam

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What does Yield to Maturity (YTM) represent for a bond investor?

Total return expected over the bond's life from today
The bond's current market value
The bond's coupon rate
The bond's face value

The correct answer is: Total return expected over the bond's life from today

Yield to Maturity (YTM) represents the total return an investor can expect to earn if the bond is held until its maturity date, assuming that all coupon payments are reinvested at the same rate as the YTM. This metric takes into account the bond’s current market price, the total number of remaining coupon payments, the face value, and the time until maturity. YTM is an important concept for bond investors as it provides a comprehensive view of the bond's profitability, factoring in not only the interest income from coupon payments but also any capital gains or losses that may occur if the bond is bought at a price different from its face value. Hence, it is a crucial indicator of the bond's attractiveness relative to other investment opportunities. The remaining options do not capture the full essence of what YTM indicates. The bond's current market value reflects its price at a specific point in time, while the coupon rate solely indicates the interest payments the bondholder receives, and the face value represents the amount paid back at maturity, neither of which encompasses the total yield an investor can expect over the life of the bond.