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a) In the previous section of this problem set, explain why the calculated YTM of a bond could
be a bad characterization (inaccurate) of the rate of return of a bond investment. Put your
response in the box below: Hint [1]: how was YTM calculated from the cash flows of the bond?
Hint [3]: see lecture notes on the concept of "yield illusion". Hint [2]: what assumptions were
made on this TVM-based calculation? b) If YTM is a potentially bad method of calculation of a
bond's rate of return, what other method of calculation is more appropriate? And why is this
method always correct (accurate)? Put your response in the box below: Hint: see lecture notes on
Realized Compound Yield [RCY]. PS: RCY is also termed as Horizon Yield [HY] and Total
Return [TR] in some textbooks. c) Are there any bad assumptions made in the calculation of the
YTM of zero-coupon bonds? Hint [1]: any incorrect TVM assumptions made on it's bond's cash
flows? Hint [2]: any "yield illusion" problems?

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a) In the previous section of this problem set, explain why the calcu.pdf

  • 1. a) In the previous section of this problem set, explain why the calculated YTM of a bond could be a bad characterization (inaccurate) of the rate of return of a bond investment. Put your response in the box below: Hint [1]: how was YTM calculated from the cash flows of the bond? Hint [3]: see lecture notes on the concept of "yield illusion". Hint [2]: what assumptions were made on this TVM-based calculation? b) If YTM is a potentially bad method of calculation of a bond's rate of return, what other method of calculation is more appropriate? And why is this method always correct (accurate)? Put your response in the box below: Hint: see lecture notes on Realized Compound Yield [RCY]. PS: RCY is also termed as Horizon Yield [HY] and Total Return [TR] in some textbooks. c) Are there any bad assumptions made in the calculation of the YTM of zero-coupon bonds? Hint [1]: any incorrect TVM assumptions made on it's bond's cash flows? Hint [2]: any "yield illusion" problems?