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CFA Level I · CFA Level I Exam · Interest Rate Risk and Return

An investor buys a fixed-rate bond that is free of default risk and holds it to maturity. The realized horizon yield will most likely equal the bond's original yield to maturity only if the coupons are reinvested at:

The realized horizon yield equals the original yield to maturity only when coupons are reinvested at that original yield, with the bond held to maturity and no default. The coupon rate matches only for a par bond, and a later short-term rate is unrelated to the original yield.

  1. Athe coupon rate.
  2. Bthe original yield to maturity.Correct
  3. Cthe prevailing short-term rate at maturity.

Explanation

The yield to maturity assumes every coupon is reinvested at that same yield and the bond is held to maturity. Reinvesting at the coupon rate gives the same result only when the bond was bought at par, so it is not generally correct. The short-term rate at maturity has no necessary link to the original yield.

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