CFA Level I · CFA Level I Exam · Yield and Yield Spread Measures for Fixed-Rate Bonds
An analyst states that yield to maturity is a reliable measure of the return an investor will earn on a fixed-rate bond held to maturity. Which condition is most likely required for this to hold?
The key condition is that coupons are reinvested at the yield to maturity. YTM also assumes the bond is held to maturity and all payments are made as scheduled. It does not require par pricing, so the other options add unnecessary conditions.
- AThe bond is priced at par
- BCoupons are reinvested at the yield to maturityCorrect
- CThe bond has no credit risk or call features and is sold at a price above par
Explanation
YTM assumes the investor holds to maturity, receives all payments on time, and reinvests coupons at the YTM. Par pricing is not required, since YTM applies to any price. The third option adds an irrelevant above-par sale requirement.
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