422.2
2. If current STRIP prices all drop, will the yield-to-maturity
of coupon bonds increase or decrease? Explain. (2
pts)
STRIP prices are the prices of pure discount bonds. The only way STRIP prices would drop is if current market rates (spot rates) increase. The YTM of a bond is a weighted average of the spot rates associated with each of the cash flows in the bond. Thus, if the spot rates associated with the bond's cash flows increase, the YTM (as a weighted average of those rates) must also increase.