FRM Part I · FRM Exam Part I · Interest Rates
A 2-year bond with a face value of 100 pays an 8% annual coupon and is priced at a yield to maturity of 6% (annual compounding). The bond is bought today, and the yield stays at 6% throughout. What is the total return over the next year, including the coupon received at year-end?
The return is 6.00%. With yield unchanged, a bond's total return over a period equals its yield. The price falls from 103.667 to 101.887 and the 8 coupon is received, so 109.887 divided by 103.667 gives 1.06. Current yield or coupon rate alone is misleading.
- A-1.72%
- B6.00%Correct
- C7.72%
- D8.00%
Explanation
Price today = 8/1.06 + 108/1.06^2 = 103.667. After one year the price is 108/1.06 = 101.887. Return = (101.887 + 8)/103.667 - 1 = 6.00%. The 7.72% option is only the current yield (8/103.667), and -1.72% is only the capital loss.
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