Understanding Yield to Maturity in Bond Valuation

Very Hard Fixed Income Valuation Yield Measures

A financial analyst is evaluating a newly issued corporate bond with a face value of $1,000. The bond has an annual coupon rate of 8% and a term of 6 years. Currently, the bond is trading at $1,050 in the market. The analyst wants to determine the bond's yield to maturity (YTM) to assess its attractiveness compared to other investments.

To calculate the YTM, the analyst should take into account the expected cash flows from the bond, which include annual coupon payments and the face value at maturity. Additionally, the curve of bond prices in the relevant market and the investor's required rate of return should factor into this calculation.

Which of the following yield measures best describes the bond's YTM?

The yield that equates the present value of future cash flows to the current market price.

The current yield based solely on the annual coupon payment divided by the current price.

The yield based on the assumption that the bond will be called at the earliest opportunity.

Hint

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