Question

1. The return on an investment in a bullet bond that is held to maturity will equal its yield-to-maturity if :
   1. The duration gap is zero.
   2. The coupon payments are reinvested at the bond’s yield-to-maturity.
   3. Interest rates remain unchanged.
   4. The bond has positive convexity.
   5. The bond is called.

Answer 1

The return on an investment in a bullet bond that is held to maturity will equal to its yield to maturity if:

a. The duration gap is zero - It does not make any sense.

b. The coupon payments are reinvested at the bond's yield to maturity. - Yes,Correct. It is the investment's bond IRR, which if the investor hold till maturity when the payment are made as scheduled and reinvested at the same rate.

c. Interest rates remain unchanged. - It is not the interest rate but Internal rate of return IRR which remain unchanged.

d. The bond has positive convexity. - It refers to the relation between bond prices and yield to maturity. And positive convexity refers to greater rise in price in comparison to the fall in yield. So it will not be equal.

e. The bond is called. - Irrelevant.

Hence the option B is correct.

Hope this answers the question.