A bond has a par value of $1,000, a time to maturity of 20 years, a coupon rate of 10% with interest paid annually, a current price of $850, and a yield to maturity of 12%.Intuitively and without using calculations, if interest payments are reinvested at 10%, the realized compound yield on this bond must be

Question

Quizplus · Accepted Answer

In order to earn yield to maturity, the coupons must be reinvested at the yield to maturity.However, as the bond is selling at discount, the yield must be higher than the coupon rate.Therefore, B is the only possible answer.

A Bond Has a Par Value of $1,000, a Time