Chapter 6.2, Problem 2CC

Summary Introduction

To Determine: The risk a default-risk free bond investor faces when the individual needs to sell the bonds before the maturity date.

Introduction:

A yield to maturity (YTM) is the rate of return projected for a security or a bond, which is apprehended until its maturity period. It is also considered as the internal rate of return (IRR) for a security or bond and it relates to the current estimation of bond’s future cash flow to its present market cost.

A coupon payment is the yearly interest payment that is remunerated to a bondholder by the issuer of the bond until the point that the debt obligation matures. The coupon payments are cyclic payments of interest offered to the bondholders. Default-free bonds do not have any default risk. A common example of default-free bonds is U.S government bonds.