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CFA Level I · CFA Level I Exam · Yield and Yield Spread Measures for Fixed-Rate Bonds

An analyst states that a bond's yield to maturity is the return an investor will earn if the bond is held to maturity. The yield to maturity will most likely equal the realized return only if:

Yield to maturity equals the realized return only if all promised cash flows are paid on time, the bond is held to maturity, and coupons are reinvested at the YTM. Different reinvestment rates or early sale make the realized return differ.

  1. Athe bond is a zero-coupon bond or trades at par
  2. Ball coupons are received on time and reinvested at the YTM, and the bond is held to maturityCorrect
  3. Cthe current yield equals the coupon rate throughout the holding period

Explanation

YTM assumes the investor holds to maturity, receives all promised payments without default, and reinvests coupons at the YTM. If reinvestment rates differ, realized return differs. Option A and C mention features that do not remove reinvestment risk for coupon bonds.

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