323.9
9.Could the yield-to-maturity on a 2-year STRIP be different from
the yield-to-maturity on a 2-year coupon bond? EXPLAIN. (3)
Sure. In class, we established that a YTM is always a weighted average of the spot rates associated with all of the cash flows in the bond. The YTM on a 2-year STRIP is dependent on the single cash flow in the STRIP (at maturity), and so represent only one spot rate: the 2-year spot rate. The YTM on a 2-year coupon bond must represent and be an average of all of the spot rates associated with all of the cash flows (including the coupon payments that occur before maturity). Thus, as long as the yield curve is not flat and spot rates for 6 months or one-year are different from spot rates for 2-years, the YTM on a coupon bond will be different from the YTM on a STRIP.