The further the yield to maturity of a bond moves away from the bond's coupon rate, the greater the price-change effect will be.

Question

Quizplus · Accepted Answer

This is because the yield to maturity represents the overall return an investor will receive from holding the bond until it matures, taking into account both the coupon payments and any capital gains or losses from changes in the bond's market value. When the yield to maturity increases above the coupon rate, it means that the bond is now offering a higher return to investors than when it was issued, which makes it more attractive and can drive up its price. Conversely, when the yield to maturity decreases below the coupon rate, it means that the bond is now offering a lower return to investors than when it was issued, which makes it less attractive and can drive down its price. Therefore, the further the yield to maturity moves away from the coupon rate, the more pronounced the effect will be on the bond's price, as investors will need to adjust their expectations of the bond's future returns and revalue the bond accordingly.

The Further the Yield to Maturity of a Bond Moves