Question

Discuss yield to maturity and how it would apply to the following statement “Relative to sovereign bonds, non-sovereign or corporate bonds with similar characteristics most likely have a yield to maturity that is higher and trade at lower prices”.        

Answer 1

Yield to maturity is the total return that could be earned on the bond if held until it matures. It is also the internal rate of return for bond, if the bond is held until it matures and all payment are made as scheduled and reinvestment at same rate.

Sovereign bonds are bonds issued and backed by the government or FED, due to which they have low default risk . As the risk is low, the yield to maturity of the bond is low and price is high. Where as in the case of corporate or non corporate bond due to higher credit risk , the yield to maturity of the bond is high and the prices are low. This satisfies the inverse relationship between price and yield to maturity.