Hi all, could anybody help me for the question below, as i am confused in these concept: If the term structure is downward-sloping, what is the yield to maturity on a 10-year coupon bearing bond? The 10-year spot interest rate is the yield to maturity on a 10-year zero coupon bond. a. Lower than the 10-year spot interest rate b. Greater than the 10-year spot interest rate c. Equal to the 10-year spot interest rate d. May be above or below the 10-year spot interest rate Thanks a lot.
Think of it this way. Times are tough and people are AVOIDING long-term risk: longer bonds are paying out LESS than short-term bonds yet you have a 10Y thats paying coupon above zero. So I would say the answer is “b”. Willy
You get to reinvest the coupons @ higher short term rates, therefore beating out the YTM of a zero. Therefore, I’d say higher YTM for the coupon bond.
Agree with Willy and ymmt.
If you issue a 10 year bond isn’t it going to be priced at the current market rates? Which would be the 10 year zero assuming reinvestment at the current term structure?
Cat Fanciers’ Association Wrote: ------------------------------------------------------- > If you issue a 10 year bond isn’t it going to be > priced at the current market rates? Which would > be the 10 year zero assuming reinvestment at the > current term structure? yep i agree with C, that’s the problem with YTM calculation.
I think the spot curve is just the yield of zeros vs. the maturity. However, this curve isn’t exactly equal to the par yield curve, and as maturity increases the spread between the par curve and the spot curve will widen. In an upward sloping term structure, we will observe that the spot curve is above the par curve. In an inverted environment, the opposite is true. You may have to check me on this though.
Yeah I always think of bonds in terms of ease or fear. Basically inflation expectations determine everything with this asset class. You got yield up/down ticks and credit quality. But basically its all about inflation. Willy