Does anyone understand the "reinvest them at a lower return than the YTM at purchase"? This confuses me. If you could clear this up - id appreciate it!
If the yield to maturity on a bond decreases after purchase but before the first coupon date and the bond is held to maturity, reinvestment risk is:
A)
less than price risk and the realized yield will be higher than the YTM at purchase.
B)
less than price risk and the realized yield will be lower than the YTM at purchase.
C)
greater than price risk and the realized yield will be lower than the YTM at purchase.
Explanation
If the bond is held to maturity, the investor will receive all coupons and principal and reinvest them at a lower return than the YTM at purchase, resulting in a lower realized yield.
(Study Session 15, Module 46.1, LOS 46.a)