Page 7 - FINAL CFA SLIDES DECEMBER 2018 DAY 15

3. If the market YTM, increases (decreases) after
purchase but before the first coupon date, a Session Unit 16:
buy-and-hold investor’s realized return will be 54. Understanding Fixed Income Risk and Return
higher (lower) than the YTM of the bond when
purchased;

For a three-year 6% bond purchased at par (YTM of 6%), first assume that the YTM and reinvestment
rate increases to 7% after purchase but before the first coupon payment date. The bond’s annualized
holding period return is calculated as:

tanties

Note that in both cases, the investor’s rate of return is between the YTM at purchase and the

assumed reinvestment rate (the new YTM).