What is the relationship between a bondholder's rate of return and the bond's yield to maturity if he does not hold the bond until it matures?
A) The rate of return will be lower than the yield to maturity.
B) The rate of return will be higher than the yield to maturity.
C) The rate of return will equal the yield to maturity.
D) It could be higher or lower.

Question

Quizplus · Accepted Answer

The rate of return of a bondholder who does not hold the bond until maturity could be higher or lower than the bond's yield to maturity depending on the price at which the bond is sold in the secondary market. If the bond is sold at a price higher than its par value, the rate of return will be lower than the yield to maturity. On the other hand, if the bond is sold at a price lower than its par value, the rate of return will be higher than the yield to maturity.

What Is the Relationship Between a Bondholder's Rate of Return