Bonds - YTM and Compound Returns investor, compound, investment

SWASH

If the TIM equals the actual compound return an investor realizes on an investment in a coupo.n bond purchased at a premium to par, it is least likely that:

Answer: the bond will not be sold at a capital loss.

Can anyone explain?

ajpheif16

what is TIM?

thisisbrianly

YTM - Yield to maturity.

sorry

pacmandefense

When you invest in a coupon paying bond, your sources of earnings are:

1. Your periodic coupon payments
2. Interest income on re-investing these periodic coupon payments into some other asset.
3. Capital gain when you sell the bond.

Now, in this case, since you have purchased the bond at a premium, means that coupon rate of the bond is higher than market (risk adjusted) interest rate.

So, from the list of earnings above, you will have higher earnings from component 1 and 2. And to keep the yield same as that from another similar investment, component 3 has to come down. So, it is MOST LIKELY you WILL HAVE CAPITAL LOSS, when you sell it.

Edit: So, it is LEAST LIKELY that bond will NOT be sold at Capital Loss.

Hope this helps.



Edited 1 time(s). Last edit at Thursday, September 24, 2009 at 03:56AM by rus1bus.

mnieman

rus1bus, can give an example(with numbers) so that we can have a better picture...

THanks!!

leadcfa

rus1bus,

this is a great explanation. I will owe my CFA designation to you hahaha.

ramdabom

haha.. that way, if I dont get my designation, atleast I will have solace that you got it for yourself