Skip to content

FRM Part I · FRM Exam Part I · Bond Yields and Return Calculations

A portfolio manager notes that a bond's yield to maturity at purchase was 5%. The bond is held to maturity and all coupons are reinvested. Under which condition will the realized compound yield equal the purchase yield to maturity?

The realized yield equals the purchase YTM only when the bond is held to maturity and every coupon is reinvested at that same YTM. YTM implicitly assumes this reinvestment rate, so any other reinvestment rate or an early sale will produce a different realized return.

  1. ACoupons are reinvested at the yield to maturity at purchase, and the bond is held to maturityCorrect
  2. BCoupons are reinvested at the coupon rate and the bond is held to maturity
  3. CCoupons are reinvested at prevailing spot rates that rise over time
  4. DThe bond is sold before maturity at its purchase price

Explanation

Yield to maturity assumes every cash flow is reinvested at the YTM itself. Only if coupons actually earn the purchase YTM and the bond is held to maturity will realized compound yield equal YTM. Reinvesting at the coupon rate gives a different result unless the bond was bought at par. Rising reinvestment rates would raise the realized yield above the YTM, and selling early exposes the investor to price risk.

Did you get it right without looking?

One question tells you little. A timed set on Bond Yields and Return Calculations shows your real accuracy, how long you take and where you lose marks.

Practise Bond Yields and Return CalculationsFree diagnostic mock

More Bond Yields and Return Calculations questions