3.21.2005

Q: List at least 2 reasons why Yield-To-Maturity...

...of a bond may not be realized.

A

  • Reinvestment risk: future interest rates may be less than the YTM, leading to less reinvestment income (ie. the interest income generated by reinvesting coupon interest payments and any principal repayments from the time of receipt to the bond's maturity.)
    • two other sources of return from holding a bond to maturity are coupon interest and capital gain/loss (when matures/called/sold)
  • Interest rate risk: cannot be held to maturity, and may have to be sold for less than the purchase price because the interest rate required by the market is higher than the YTM.

Category: C++ Quant > Debt > Valuation

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