How does the time to maturity of a bond affect its yield to maturity (YTM)? A. Bonds with longer maturities have higher YTMs B. Bonds with longer maturities have lower YTMs C. Time to maturity has no impact on YTM D. Bonds with longer maturities have unpredictable YTMs
Question
How does the time to maturity of a bond affect its yield to maturity (YTM)? A. Bonds with longer maturities have higher YTMs B. Bonds with longer maturities have lower YTMs C. Time to maturity has no impact on YTM D. Bonds with longer maturities have unpredictable YTMs
Solution
The relationship between the time to maturity of a bond and its yield to maturity (YTM) is not straightforward and can be influenced by various factors such as interest rates, credit risk, and market conditions. However, generally speaking, all else being equal:
A. Bonds with longer maturities often have higher YTMs. This is because the longer the time to maturity, the greater the risk associated with the bond (such as interest rate risk and credit risk). To compensate for this increased risk, investors demand a higher yield.
So, the most accurate answer to your question would be A. Bonds with longer maturities have higher YTMs. However, it's important to note that this is a general rule and may not hold true in all circumstances.
Similar Questions
A bond that is held to maturity A. will necessarily have a yield to maturity equal to the coupon rate. B. will necessarily earn the yield to maturity at the time of purchase. C. may earn more or less that its yield to maturity at the time of purchase because the rate at which coupons can be reinvested may change. D. will earn the yield to maturity at the date of maturity.
Consider a coupon bond with a coupon rate of 10%. The face value amount is unknown. Suppose the bond is trading at a par. What can we say about yield to maturity of the bond? a. YTM = 10%. b. YTM is negative. c. There is not enough information to answer the question. d. YTM < 10%. e. YTM > 10%.
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