The approximate yield to maturity method tends to understate the yield for bonds trading at a discount.

Question

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The approximate yield to maturity method assumes that the bond will be held till maturity and does not take into account the reinvestment of coupon payments. As such, for bonds trading at a discount, where the coupon rate is lower than the prevailing yield, the reinvestment of coupon payments will actually increase the yield earned. The approximation does not account for this, resulting in a lower yield estimate.

The Approximate Yield to Maturity Method Tends to Understate the Yield