coupon reinvestment.

[TheExpat]

Please explain that
” ytm equals the rate of return ovet the life of the bond if all coupons are REINVESTED at rate equal to the bond’s ytm”
How reinvestment done ? And what will happen if no reinvestment.

 

[S2000magician]

You receive the coupon payments and invest them (in more bonds, or in the bank, or lending them at usurous rates, or something) rather than splurging at Starbuck’s.
If you don’t reinvest them, then your reinvestment rate is zero; uness your YTM is zero, your realized return will be less than your YTM.

 

[freecfa]

Hi there,
The reinvestment of the coupons doesn’t physically take place it is assumption of the YTM calculation that they are reinvested at a rate equal to the YTM. This is actually one of the weakness of the YTM as a measure of return because if the coupons are not reinvested at a rate at least equal to the YTM then they will actually receive a return that is less than the YTM if the bond is held to maturity.
To answer the second part of your question, if there is no reinvestment then the investor will receive a return that is less than the YTM if the bond is held until maturity as they will forgo the effect of the compound return on the reinvested income.