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