1) For a bond's yield to maturity (YTM) to be realized, the bond must be held to maturity and all interim cash flows must be reinvested at the YTM rate.
2) An example shows that reinvesting coupon payments and principal at 8% for 25 years results in a 7100 end wealth value, while without reinvestment the ending value is only 3000.
3) For the YTM to be the actual realized yield, reinvestment is required; otherwise, the yield will be lower than anticipated.
1) For a bond's yield to maturity (YTM) to be realized, the bond must be held to maturity and all interim cash flows must be reinvested at the YTM rate.
2) An example shows that reinvesting coupon payments and principal at 8% for 25 years results in a 7100 end wealth value, while without reinvestment the ending value is only 3000.
3) For the YTM to be the actual realized yield, reinvestment is required; otherwise, the yield will be lower than anticipated.
1) For a bond's yield to maturity (YTM) to be realized, the bond must be held to maturity and all interim cash flows must be reinvested at the YTM rate.
2) An example shows that reinvesting coupon payments and principal at 8% for 25 years results in a 7100 end wealth value, while without reinvestment the ending value is only 3000.
3) For the YTM to be the actual realized yield, reinvestment is required; otherwise, the yield will be lower than anticipated.
1) You hold the bond to maturity 2) All interim cash flows are reinvested at the interest rate that solves for the computed YTM. 8% reinvested for 25 years 7100 end of wealth value
4100 interest on interest
2000 coupon payments
1000 Principal return
1000
Without reinvestment you end up with 3000 !!!
• This means 1000 = 3000 • (1 +i) 25
• i = 4.5% this is the realized yield
• People suffer from yield illusion • Again just to be clear– Suppose a 20 year bond has a 15% YTM
• WE would realize this only if we were able
to reinvest all coupons at 15% for 20 years • Question to think about – if this could be done –How long would it take to recover the cost ( price ) of the bond? • See buffet books video • You may want to look at the Buffet books page. • You can see the calculators on that site • Here’s the link https://www.buffettsbooks.com/