Discuss whether the following statement is true or false:
An investor is considering purchasing either a zero-coupon bond with 5 years to maturity or a 10% coupon bond with 5 years to maturity,but if both bonds have identical yields to maturity and the investor expects to hold the bond for the full 5 years,then it does not matter which bond is purchased.

Question

Quizplus · Accepted Answer

Yield to maturity implicitly assumes that any intermediate income received from a bond is reinvested at the same rate.If the interest rates in the market move,the coupons received on a bond will need to be re-invested at the new rates,consequently affecting the realized yields.This is commonly known as re-investment risk.However,for a zero-coupon bond,the yield to maturity will always be equal to the realized yield.

Discuss Whether the Following Statement Is True or False