Question

Is it better for bondholders when the yield to maturity increases or​ decreases? Bondholders are better off when the yield to​ maturity: A. ​decreases, since this represents an increase in the price of the bond and a decrease in potential capital losses. B. ​increases, since this represents a decrease in the price of the bond and an increase in potential capital gains. C. ​decreases, since this represents an increase in the coupon payment and an increase in potential capital gains. D. ​increases, since this represents a decrease in the bond maturity and a decrease in potential capital losses.

Answer 1

Answer: Bondholders are better off when the yield to​ maturity: decreases, since this represents an increase in the price of the bond and a decrease in potential capital losses.

Here, the relation is inversely proportional between bondholders welfare and his/her yield to maturity.