one of the general assumptions applied to a bond’s YTM is that its coupons are reinvested at YTM,
In real life, what are some of the causes that create difference between the two rates?
If you buy a bond and get $30 coupon payments every 6 months, there’s not mich else you can do but stick them in the bank; your reinvestment rate will be paltry. Even if you could reinvest them in a CD or some other longer term investment, the return will likely be less than the bond’s YTM.
If you have a large investment in bonds, so your coupoin payments are enough to buy more bonds, if you buy bonds with a different maturity than the original bond – probably shorter – the yield will be different than that of the original bond.
Does a change in YTM affect interest rate risk? Or is interest rate risk mostly tied to the coupon rate only?
For normal bonds, modified or effective duration decreases as YTM increases, so interest rate risk decreases as YTM increases.
For normal bonds, modified or effective duration decreases as coupon increases, so interest rate risk decreases as coupon increases.
I wrote an article that may help on this: http://financialexamhelp123.com/macaulay-duration-modified-duration-and-effective-duration/.