Total Return Calculation for a Discount Bond

Very Hard Fixed Income Valuation Yield Measures

Consider a bond that pays a coupon of 5% annually, has a face value of $1,000, and matures in 10 years. The yield to maturity (YTM) on the bond is currently 7%. Assuming the bond's coupons are reinvested at the YTM, what is the bond’s total return over the 10-year period?

Furthermore, consider that the bond is priced at a discount to its face value due to the yield being higher than the coupon rate. Calculate the total return that an investor would realize if they hold the bond to maturity.

10% total return due to the average of the coupon rate and price appreciation.

Approximately 5% total return as the return is dictated solely by the coupon rate.

About 6.15% total return, factoring in the coupon payments and capital gain.

Hint

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