YTM versus Holding Period Average Return

YTM is often considered to be the holding period average return. However, this is often incorrect. This is correct if and only if:

the investor holds the bond until maturity

coupons and principal are paid as promised

the reinvestment rate of coupons is equal to the YTM$,$ something highly unlikely.

Consider an investor with a five$-$year investment horizon and the following two bonds. Assume the cash flows over the next $5$ years can be reinvested at $8\%.$ What is the expected rate of return for Bond A and which bond is the best choice? Hint: Compare the expected rate of return for Bond A and B$.$ Note that for Bond B YTM $=$ Reinvestment Rate$=8\%$ so expected rate of return is easy to find.

Bond Coupon Maturity YTM

A $5\%310\%$

B $8\%58\%$

Group of answer choices

$6\mathrm{.}2\%,$ Bond B

$7\mathrm{.}5\%,$ Bond B

$10\mathrm{.}25\%,$ Bond A

$9\mathrm{.}13\%,$ Bond A