323.10
10.If the yield-to-maturity on a 2-year coupon bond is greater
than the yield-to-maturity on a 1-year STRIP, is the yield-to-maturity
on a 2-year STRIP greater-than, less-than, or equal to the yield-to-maturity
on the 1-year STRIP (say that 5 times fast)? EXPLAIN. (4)
Greater than. In class, we talked about the fact that the YTM on a coupon bond is a weighted average of the YTM’s on the STRIPS corresponding to the cash flows of the bond. If it is bigger than the first STRIP, then the second number in the average (the second STRIP’s YTM) must be greater than the first STRIP’s.