Answer: Coupons are reinvested at the same rate as the yield to maturity at purchase

## Explanation Yield to maturity (YTM) is the internal rate of return (IRR) earned by an investor who buys a bond at the current market price and holds it until maturity, assuming: 1. **All coupon payments are reinvested at the same rate as the YTM** - This is the key assumption in option C 2. The bond is held to maturity 3. All payments (coupons and principal) are made as scheduled **Why the other options are incorrect:** - **Option A (Credit quality remains the same)**: YTM does not assume credit quality remains constant. Changes in credit quality affect bond prices and yields, but YTM calculation itself doesn't incorporate this assumption. - **Option B (Bond sold at same price as purchase price)**: YTM assumes the bond is held to maturity, not sold before maturity. The calculation includes receiving the face value at maturity, not selling at the purchase price. **Key Points:** - YTM is a promised yield, not a realized yield, because the reinvestment assumption may not hold in reality - If interest rates change, coupon reinvestment rates will differ from the YTM, affecting actual returns - This reinvestment risk is a significant limitation of YTM as a measure of expected return

Author: LeetQuiz .