Question

Last year, a company issued a 10-year annual coupon bond at par value with a yield to maturity of 10.20%. The current yield to maturity has increased to 10.50%. Investors anticipate another increase in yield to maturity over the next 12 months to 10.80%. If the investors forecast accurately, what will be the rate of return on an investment in this bond over the next year? (Do not round intermediate calculations. Enter your final answer as a percent rounded to 2 decimal places.)

Answer 1

	$ Income
100	10.2	Last yr.
100	10.5	Current yr.
100	10.8	Next yr.

Yield to maturity (YTM) on a bond is the estimated rate of return ,based entirely on the assumption that the same will be held till maturity date and will not be called any time in-between.It is the rate of return for the entire life of the bond.

Return,is the total $ return ,the bond-investment has actually earned during a specified time period in the past--which includes periodic coupon interest received & appreciation in market value .It is expressed as % of the investment & considers the past performance for its calculations--ie. what an investment has actually earned--including notional .

So,rate of return on an investment in this bond over the next year will be

(the annual coupon + the appreciation in this yield to maturity ,as a % of the investment)

ie.( 10.80-10.50)/100=

0.30%

Plus the ( $ coupon interest /Face value)

The sum of the above two will be the TOTAL Rate of return on buying the bond this yr. & holding it until next yr.